Pension Drawdown Death UK (2026): Tax Rules and Passing on Drawdown Funds

When a person who is in flexi-access drawdown (or capped drawdown) dies, the remaining funds in their pension drawdown account do not form part of their estate — they remain within the pension wrapper and are dealt with by the pension scheme's trustees or administrators. The trustees have discretion over who receives the funds, guided by any expression of wishes or nomination form the deceased completed. The tax treatment depends entirely on whether the deceased was under or over age 75 when they died: if under 75, the remaining drawdown fund can be paid to nominees as a lump sum (Uncrystallised Funds Pension Lump Sum — UFPLS), drawn down as nominee drawdown, or used to buy an annuity — all tax-free; if over 75, any payments to beneficiaries are taxed at the beneficiary's marginal rate of income tax. The pension fund itself is generally outside the deceased's estate for inheritance tax purposes (subject to proposed changes from 2027) because it remains a discretionary trust fund, meaning it can pass to any nominated beneficiary without IHT — regardless of the nil-rate band.

The 2-year rule is one of the most critically important — and most commonly missed — rules in pension death planning. For death before age 75: if the pension provider does not designate the drawdown funds to a beneficiary (or begin paying a lump sum) within 2 years of the date of death (or within 2 years of the date the pension provider could reasonably have known about the death, if later), the tax-free status of the benefit is lost. After the 2-year window, a lump sum payment to a beneficiary becomes a 'serious ill-health lump sum' or similar taxable category and the beneficiary pays income tax at their marginal rate — even if the deceased died before age 75. The 2-year rule is therefore a strict deadline: the executor or nominated beneficiaries must contact the pension provider promptly, provide a death certificate, and actively engage with the designation process. If the estate is complex or probate is taking a long time, the nominated beneficiaries should still contact the pension provider immediately to start the clock for the 2-year designation. Some providers have their own internal processes and will request documentation; prompt response to all requests is essential.

Nominee drawdown is a form of pension drawdown available to beneficiaries (nominees) who inherit pension funds following the death of the original pension holder. Instead of receiving the pension fund as a lump sum, the nominee can have the funds designated into their own drawdown account and draw from it at any time and in any amount, subject to the same tax rules: if the original pension holder died before 75, payments from nominee drawdown to the nominee are tax-free; if the original holder died after 75, payments are taxed at the nominee's marginal income tax rate. Nominee drawdown is available to any person who is nominated as a beneficiary by the pension holder — it does not need to be a dependant. This is a major advantage over the old annuity system: unspent nominee drawdown funds can be passed on again to the nominee's own successors on their death. The chain can continue for multiple generations: the successors of nominees can receive what is called 'successors' drawdown'. Nominated beneficiaries must act within the 2-year designation window to preserve the tax-free status (for pre-75 deaths) of the inherited drawdown.

Age 75 is the pivotal trigger for pension death benefit taxation: (1) Death before age 75: all remaining pension funds — whether crystallised (in drawdown) or uncrystallised (not yet accessed) — can pass to nominated beneficiaries completely free of income tax. The beneficiary can receive the money as a lump sum, take it as nominee drawdown, or purchase an annuity, all tax-free. This is a significant advantage and is the reason many financial advisers recommend keeping pension funds intact rather than withdrawing them: the pension can be passed on tax-efficiently to the next generation. (2) Death on or after age 75: all remaining pension funds are paid to beneficiaries as taxable income — the beneficiary pays income tax at their marginal rate on every withdrawal or lump sum received. At a 40% or 45% marginal rate, this can be a substantial tax charge. Tax is deducted at source by the pension provider using the beneficiary's tax code; if the beneficiary's income is lower, they can reclaim any overpaid tax from HMRC. Planning implication: those who die with significant pension funds before age 75 can pass them to beneficiaries very tax-efficiently; those who expect to live past 75 should consider whether drawing down to use the lifetime allowance (where applicable) or gifting from drawdown withdrawals is preferable.

In most cases, no — pension funds (including funds in drawdown) remain outside the estate for inheritance tax purposes because they are held under a discretionary trust by the pension scheme trustees. The trustees decide who receives the funds (guided by the expression of wishes), and because the decision is discretionary, the funds are not treated as the pension holder's property for IHT. This means pension drawdown funds pass to beneficiaries free of IHT, regardless of how large the pot is. However, there are important caveats: (1) If the pension holder has already drawn funds out of the pension (withdrawn cash) and those funds are sitting in their bank or investment account at death, those funds ARE in the estate and subject to IHT. (2) From 6 April 2027, HMRC has proposed significant changes to bring most pension death benefits into the IHT estate — under the Finance Act 2024 measures. This would mean that pension drawdown funds inherited after April 2027 could be subject to IHT for the first time; the detail remains subject to HMRC consultation. (3) Always check whether any specific pension scheme rules or insurance policy terms affect the IHT treatment. The current (pre-2027) position is that pension drawdown is outside the estate; from 2027 this may change substantially.

For pension drawdown funds, the expression of wishes (also called a nomination form or beneficiary nomination) is the most important document the pension holder can complete. The pension trustees have discretion to pay the funds to anyone they choose, but they invariably follow the expression of wishes unless there is a strong reason not to. An outdated or missing expression of wishes means the trustees must use their own judgment — which may not match the pension holder's intentions. Common problems: (1) A divorced person who remarried but did not update the nomination — the pension may go to the ex-spouse. (2) A person with children from a previous relationship who nominates a new partner — children may receive nothing unless named. (3) No nomination at all — trustees may pay the entire fund to the estate (meaning IHT applies and the probate timeline delays payment) rather than directly to family members. The expression of wishes is not legally binding but is followed in practice; it should be reviewed every few years and updated after major life events (marriage, divorce, birth of children, death of a named beneficiary). Keep a copy in your will file and tell your executor where it is.

Successors' drawdown is the mechanism by which pension funds that were inherited as nominee drawdown can be passed on again to a further generation when the nominee (beneficiary) dies. The chain works as follows: pension holder dies → funds designated to nominee as nominee drawdown → nominee later dies → successor (anyone the nominee nominates) inherits as 'successors' drawdown'. The same age-75 and 2-year rules apply at each step in the chain — but the relevant age 75 and the 2-year window are those of the person who died, not the original pension holder. So if a nominee inherits a pension (tax-free, because the original holder died before 75) and then dies before their own age 75, their successors receive the funds tax-free. Pension funds can therefore theoretically pass down multiple generations remaining largely within the pension tax wrapper, with taxes applying only when funds are actually withdrawn. This 'pension cascade' planning technique makes pension drawdown one of the most powerful intergenerational wealth transfer tools available in the UK — particularly for larger pension pots that exceed the pension holder's living needs.