What Happens to Your Drawdown Pension After Death?

Understanding what happens to your drawdown pension after death is crucial for effective retirement planning and estate management.

Who can inherit your drawdown pension?

Your drawdown pension can be inherited by anyone you nominate as a beneficiary. This can include family members, such as spouses, children, or grandchildren, as well as friends or charities. It’s essential to update your pension provider with your preferred beneficiaries to ensure the funds are distributed according to your wishes in the event of your death.

You can’t use your will to nominate a beneficiary. This has to be done through your pension provider. 

When you die, the remaining funds in your drawdown pension account will then be passed on to your chosen beneficiaries. The treatment of these funds will depend on various factors, such as your age at the time of death and the pension provider’s policies.

Is an inherited drawdown pension subject to inheritance tax?

The way in which an inherited drawdown pension is taxed will depend on the age at which the recipient passes away and their arrangement with their pension provider. 

If you die before age 75

If you pass away before the age of 75 with funds remaining in your drawdown pension, your beneficiaries can inherit the pension tax-free. However, this depends on whether it is passed down as a Lump Sum Death Benefit or if the beneficiary is a flexi access nominee (arranged with your provider)

If the amount is taken as a Lump Sum Death Benefit, and this lump sum exceeds the £1.073m Allowance, the excess would be subject to income tax even before age 75.

However, using a flexi nominee drawdown scheme, any amount can be passed into drawdown for the beneficiary and then taken out income tax free. This highlights the importance of ensuring your scheme has a drawdown nominee – many overlook this feature! 

If you die after age 75

If you die after the age of 75 with remaining funds in your drawdown pension, your beneficiaries can still inherit the pension, but it will be subject to tax at the beneficiary’s marginal rate of tax. The Lump Sum Death Benefit Allowance no longer applies.

Death benefit taxation summary table

Form of inherited pensionDeath pre 75Death post 75
Lump Sum Death BenefitTax-free*Taxed at beneficiaries’ marginal rate**
Beneficiary Flexi Access DrawdownTax-freeTaxed at beneficiaries’ marginal rate

* Subject to Individual Lump Sum Death Benefit Allowance – any excess will be taxed at marginal rate income tax

** For a trust (45%) / Charity (tax-free)

Lump Sum Death Benefit Allowance (LSDBA)

New tax laws were changed in April 2024, introducing the Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA). The LSDBA has introduced a limit on the amount of money that can be taken as a tax-free lump sum by the beneficiaries. 

The standard allowance is £1,073,100. However, this could be higher if you hold any pension protections (e.g. individual protection or fixed protection). This means that, as highlighted above, any lump sums may be subject to tax, even if the pension holder passes before 75.

This limit may be reduced by:

  • Pension Commencement Lump Sum (PCLS) taken by the member prior to death
  • Protected Tax Free Cash taken by the member prior to death
  • The tax-free element of UFPLS taken by the member prior to death
  • Serious ill-health lump sum taken by the member prior to death
  • Death benefit lump sums taken by the beneficiary after the member’s death
  • Employer’s Death in Service linked to pension

However, using a flexi-nominee drawdown scheme, any amount can be passed into drawdown for the beneficiary and taken out tax-free (if the member died before age 75). 

Advantages of Drawdown Pensions on Death

  • Tax-Free Inheritance Before Age 75 for drawdown nominees

If the account holder dies before the age of 75, any remaining funds in the drawdown pension can be passed on to beneficiaries tax-free, provided there is a flexi access drawdown nominee. 

  • Investment Opportunities

If the drawdown pension is not fully depleted before the account holder’s death, the remaining funds continue to be invested. This means that there is the potential for the pension fund to continue growing, providing beneficiaries with a larger inheritance than if the funds were held in a traditional annuity.

  • No Requirement for Annuity Purchase

Unlike with some other pension options, beneficiaries of a drawdown pension are not required to purchase an annuity with the inherited funds. This gives them greater control over how they manage and access the inheritance.

Learn more about What Happens To Pension Annuity After Death.

Pension Drawdown After Death FAQs

Who can receive benefits after the recipient passes away?

This depends on the arrangements that you have for your pension and how it will be passed down. 

If it’s a lump sum, this can be passed on to: 

  • Dependents
  • Any other beneficiary nominated by the member
  • Any other beneficiary chosen at the discretion of the scheme administrator

If it’s flexi access drawdown, this can be passed on to: 

  • Dependent
  • Anyone nominated by the member on their expression of wish

The scheme administrator cannot use their discretion to give flexi-access to anyone else if there is a nomination on file or a dependent exists.

Can my children inherit my drawdown pension?

Who inherits your pension is completely up to you. You decide your beneficiaries, which can be a spouse, child, multiple people, or charity.

How long does pension take to payout after death?

Payout after death depends on your provider, but typically pension providers aim to release the funds via bank transfer within 20-30 days.

Disclaimer: Inheritance Tax, Estate and Tax Planning is not regulated by the Financial Conduct Authority. The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested. Tax treatment varies according to individual circumstances and is subject to change.