Introduction
If you hold a SIPP and a Stocks and Shares ISA, the tax your family pays on what you leave behind has just moved in two directions at once. On 28 October 2026 the Government removed the two year deadline that could turn an otherwise tax free inherited pension into taxable income. From 6 April 2027, unused pension funds come inside the estate for Inheritance Tax for the first time.
The two changes pull against each other and are easy to confuse. One removes an Income Tax trap that caught grieving families through no fault of their own. The other adds a tax pensions have never faced. This guide sets out what each does, which old rules survive, and how an inherited pension now compares with an ISA passed to the same person.
Every figure below comes from HMRC, HM Treasury or the underlying legislation, checked on 9 November 2026.
The information provided on this page and throughout the website is for general information purposes only and does not constitute financial advice. It is important that you conduct your own research and consider your own personal circumstances before making any investment decisions.
Tax treatment depends on your individual circumstances and the rules described here may change. Pension and estate decisions are not easily reversed, so consider taking regulated advice before acting.
Quick Answer: What Happens To An Inherited Pension Now
The two year rule is gone for members who died before 75, so an otherwise tax free inherited pension stays tax free however late it is paid. The age 75 split and the Lump Sum and Death Benefit Allowance both remain. From 6 April 2027, unused pension funds also count towards the estate for Inheritance Tax.
What Changed On 28 October 2026
Until Budget day 2026, a death benefit that would otherwise have been paid tax free became taxable if it was paid more than two years after the pension scheme first learned of the member’s death. HMRC’s own policy paper is unusually blunt about the unfairness, noting that the charge applied even where neither the scheme administrator nor the beneficiaries had control over the delay.
The clock never ran from the date of death. It ran from the point the scheme administrator became aware of it, often a much later date. Probate disputes, missing paperwork, overseas assets and schemes that could not trace a beneficiary all ate into the same two years.
Where the deadline was missed, an individual beneficiary was taxed through PAYE as pension income. Where the money went elsewhere, to a trust or to the member’s estate, a flat charge of 45 per cent applied instead.
The removal applies to payments made on or after 28 October 2026. It covers lump sum death benefits paid to individuals and to non qualifying persons such as trusts and estates, and beneficiary income withdrawals and annuities bought from the deceased member’s drawdown funds. HMRC has told scheme administrators to stop deducting tax solely because a payment falls outside the old window. The legislation follows in Finance Bill 2026 to 2027.
It is a narrow fix: HMRC estimates it touches roughly 4 per cent of the schemes that pay lump sum death benefits.
The 45 Per Cent Charge Has Gone
Under the old rule, an otherwise tax free inherited pension paid late to a trust or the member's estate carried a flat 45 per cent charge. It no longer applies to payments made on or after 28 October 2026.
Why The Two Year Clock Caught Families Out
The chart shows why timing mattered. Under the old rules the tax on an inherited pension was nil up to the two year mark and then jumped straight to the beneficiary’s marginal rate, or to 45 per cent for a trust or an estate. There was no tapering. Under the new rules the line stays flat at nil.
Source: HMRC policy paper, Income Tax: removing the pensions tax two-year rule, and GOV.UK guidance on tax on a private pension you inherit. Verified 9 November 2026. The 45 per cent line is the flat charge that applied to a trust or an estate; an individual beneficiary was taxed at their own marginal rate.
Inherited Pension Rules Still Depend On Age 75
Removing the two year rule did not make an inherited pension tax free. The oldest and most important dividing line is untouched: the age the member had reached when they died.
Where the member died before 75, most lump sums are paid with no Income Tax, provided the amount sits within the member’s remaining Lump Sum and Death Benefit Allowance. Beneficiary drawdown and a beneficiary annuity from a fund designated after April 2015 are also free of Income Tax.
Where the member died at 75 or over, the provider deducts Income Tax from most lump sums and from drawdown and annuity payments, and the beneficiary pays at their own marginal rate. The allowance test only applies where the member died under 75.
The standard Lump Sum and Death Benefit Allowance is £1,073,100 for the 2026/27 tax year, alongside a lump sum allowance of £268,275. Where a payment exceeds the allowance, the estate’s administrator has to tell HMRC within 13 months of the death, or within 30 days of realising that tax is owed, whichever is later.
| What is paid | Member died before 75 | Member died at 75 or over |
|---|---|---|
| Lump sum death benefit | No Income Tax, if within the Lump Sum and Death Benefit Allowance | Income Tax deducted by the provider, at the beneficiary’s marginal rate |
| Beneficiary drawdown | No Income Tax on funds designated after April 2015 | Income Tax deducted by the provider |
| Beneficiary annuity | No Income Tax | Income Tax deducted by the provider |
| Allowance test | Applies. Standard allowance £1,073,100 for 2026/27 | Does not apply |
| Two year payment deadline | Removed for payments made on or after 28 October 2026 | Not relevant, these benefits were already taxable whatever the timing |
Sources: GOV.UK, Tax on a private pension you inherit, and HMRC rates and allowances for pension schemes. Verified 9 November 2026.
The April 2027 Inheritance Tax Change Pulls The Other Way
The relief described above sits next to a much larger change running in the opposite direction. For deaths on or after 6 April 2027, most unused pension funds and death benefits are treated as part of the deceased’s estate for Inheritance Tax. HM Treasury’s technical note gives this a name of its own, notional pension property.
This is a genuine reversal. Pensions have sat outside the estate for years, which is why so many savers were told to spend other money first and leave the pension untouched. From April 2027 that logic weakens, and the shift towards guaranteed retirement income makes what is left at the end a live question.
The mechanics matter too. Personal representatives can withhold up to half of the benefits while they work out the tax, and either they or the beneficiary can use a direct payment scheme so the tax comes out of the pension rather than other assets. Residence counts as well: a long term UK resident is charged wherever the scheme sits, a point worth reading alongside the rules that apply once you leave the UK.
What Is In Scope
Most unused funds and death benefits from registered pension schemes, qualifying non UK schemes and section 615(3) schemes, wherever the scheme is established for a long term UK resident.
What Is Excluded
Dependants' scheme pensions, trivial commutation lump sums replacing a dependants' pension, certain joint life annuity benefits, and death in service benefits paid from the employment held at death.
Who Reports And Pays
Personal representatives report and pay, with the tax due at the end of the sixth month after the death. Once benefits vest in a beneficiary, that beneficiary becomes jointly and severally liable alongside them.
The Spouse Exemption Survives
Funds passing to a spouse or civil partner who is a long term UK resident stay exempt. The exemption is not netted off automatically, so personal representatives have to claim it on the account.
How An Inherited Pension Compares With An ISA
An inherited pension and an inherited ISA have always been mirror images, and from April 2027 the two look far more alike than they used to.
ISA investments have always formed part of the estate for Inheritance Tax. What an ISA has instead is a shelter that keeps working afterwards. The account becomes a continuing account of a deceased investor under regulation 2G of the Individual Savings Account Regulations 1998, and income and gains inside it stay free of Income Tax and Capital Gains Tax while that status lasts.
That status ends on the earliest of three events: the completion of the estate administration, the withdrawal of everything in the account, or the third anniversary of the death. If none of those has happened first, the provider closes the account 3 years and 1 day after the death. No new money can be paid in during that period.
A surviving spouse or civil partner also gets an additional permitted subscription, a one off extra allowance on top of the standard £20,000 for the 2026/27 tax year. It is worth the higher of the ISA value at the date of death and its value when the continuing account ended. Cash must be subscribed within 3 years of the death, and investments moved across as they stand within 180 days of beneficial ownership passing.
| On death | Pension, SIPP or workplace | Stocks and Shares ISA |
|---|---|---|
| Inheritance Tax, deaths before 6 April 2027 | Generally outside the estate | Inside the estate |
| Inheritance Tax, deaths from 6 April 2027 | Most unused funds inside the estate as notional pension property | Inside the estate, unchanged |
| Income Tax for the beneficiary | None if the member died before 75 and within the allowance, otherwise at the beneficiary’s marginal rate | None while the wrapper exemption continues |
| How long the shelter lasts | Until the funds are paid out or designated to a beneficiary | Until administration completes, the account closes, or the third anniversary of the death, whichever is first |
| Spouse or civil partner relief | Spouse exemption from April 2027, claimed by the personal representatives | Additional permitted subscription, the higher of the value at death or at closure |
| Further contributions after death | Not possible | Not possible into a continuing account |
Sources: HM Treasury technical note on Inheritance Tax on pensions, the Individual Savings Account Regulations 1998 regulation 2G, and GOV.UK ISA guidance. Verified 9 November 2026.
Where The Official Guidance Has Not Caught Up
One practical warning. When we checked on 9 November 2026, the public GOV.UK page on tax on a private pension you inherit still described the two year deadline as live, and its own metadata showed a last revision of 27 October 2026, the day before the Budget. The change is confirmed in HMRC’s policy paper and in Pension schemes newsletter 186, but the plain English page a family dealing with an inherited pension is most likely to find had not yet been rewritten. Both documents are linked at the end of this article.
Compare the platforms that hold UK pensions and ISAs
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What To Check Now
None of this calls for a decision today. Two jobs are worth doing, whether you hold the pension or are dealing with an inherited pension now.
The first is your expression of wish, sometimes called a nomination of beneficiaries. It tells the scheme who you would like the money to go to, and you can change it whenever you like. A form filled in when you started a job and never revisited is a common reason pension money ends up somewhere unintended.
The second is knowing which wrapper holds what. The April 2027 change turns the balance between a pension and an ISA into an estate question as well as a tax relief one. Our AJ Bell review is one of the platform reviews that sets out which account types each provider offers. Where the sums are large, this is a conversation for a qualified adviser rather than something to settle from an article.
Check Your Expression Of Wish
Ask each pension provider what nomination they hold for you. Schemes from previous jobs are most likely to be out of date.
Know Which Wrapper Holds What
Write down what sits in pensions and what sits in ISAs. From April 2027 that split changes what your estate is worth.
Frequently Asked Questions About Inherited Pension Tax
Key Takeaways
The Two Year Trap Has Gone
For members who died before 75, an inherited pension no longer becomes taxable just because it was paid more than two years after the scheme learned of the death.
Age 75 Still Decides Most Of It
Died before 75 and within the allowance means no Income Tax. Died at 75 or over means the beneficiary pays at their marginal rate, whatever the timing.
April 2027 Is The Bigger Change
From 6 April 2027 most unused pension funds count towards the estate for Inheritance Tax, removing the main reason savers were told to leave a pension untouched.
An ISA Keeps Its Own Shelter
ISA investments were always in the estate, but income and gains stay sheltered until administration completes or the third anniversary of the death.
See how UK platforms compare on cost and account types
Capital at risk.
Sources: HMRC, Tax treatment of pension and lump sum death benefits under the two-year rule; HMRC, Pension schemes newsletter 186, October 2026; HM Treasury, Technical note: Inheritance Tax on pensions; GOV.UK, Tax on a private pension you inherit; HMRC, Rates and allowances: pension schemes; Individual Savings Account Regulations 1998, regulation 2G; GOV.UK, Individual Savings Accounts, if you die. All verified 9 November 2026.
The information provided on this page and throughout the website is for general information purposes only and does not constitute financial advice. It is important that you conduct your own research and consider your own personal circumstances before making any investment decisions.
Tax treatment depends on your individual circumstances and the rules described here may change. Pension and estate decisions are not easily reversed, so consider taking regulated advice before acting.
