If you die before you’re 75, anyone who inherits your defined contribution pension fund won’t pay any tax.
This is subject to the money being paid (or moved into another arrangement for payment as income or lump sums in the future) within two years of the earlier of the following dates:
- The date the pension scheme administrator first knew of your death, or
- The date the scheme administrator could reasonably have been expected to know of your death.
If you die before the age of 75, any pension that has not been accessed already will be tested against your lifetime allowance. Once tested at this point, no further tests against the lifetime allowance will take place.
If a pension has been accessed and a guaranteed income (an annuity) or flexible retirement income (pension drawdown) set up, these will have been tested when set up and no further tests would take place before 75.
The lifetime allowance is the limit you can build up in pensions over your lifetime while still enjoying the full tax benefits.
Currently, the lifetime allowance is £1,073,100.
The lifetime allowance will remain at this level until 5 April 2026.
If this allowance is exceeded, a tax charge must be paid on the amount above the allowance.
However, any pension that a beneficiary inherits won’t count towards their own lifetime allowance.