Inherited a Pension in Drawdown? A Beneficiary's Guide

When someone dies with money still invested in a pension, that pot does not simply vanish or automatically fall into their estate. It can pass to the people they nominated — and, in many cases, stay invested in a tax-efficient wrapper of its own. This is often called beneficiary drawdown, and understanding how it works matters more than ever with major inheritance tax changes arriving in April 2027.

Most of our guides look at what happens from the pension holder's point of view. This one flips the perspective: you are the person who has inherited the pot. Here is how the rules work, the choices you may face, and the tax treatment you need to understand — as information, not personalised advice.

What is beneficiary drawdown?

Beneficiary drawdown (sometimes called inherited drawdown) lets you keep an inherited defined contribution pension invested in your own drawdown plan, taking income or lump sums flexibly as and when you choose. You do not have to be a spouse or even a relative — the pension holder can nominate anyone, and the scheme administrator ultimately decides who receives the funds, usually guided by that nomination.

There are two related terms you will come across:

• Nominee flexi-access drawdown — where you inherit directly from the original pension holder because you were nominated (or selected) to receive the funds.
• Successor flexi-access drawdown — where you inherit a pot that was already in beneficiary drawdown, because the previous beneficiary has now died.

In both cases the money stays inside a pension wrapper, so it continues to grow largely free of UK income tax and capital gains tax while invested. You can normally take as much or as little as you like, whenever you like. This is quite different from simply receiving a cash lump sum, which lands in your bank account and loses that ongoing shelter.

How inherited pensions are taxed on withdrawal

The single most important factor is the age of the person you inherited from when they died.

If they died before age 75: withdrawals from the inherited pot are generally free of income tax, provided the funds are designated to you within two years of the scheme administrator becoming aware of the death. Lump sum death benefits paid before 75 are also tax-free up to the Lump Sum and Death Benefit Allowance, which is £1,073,100 for the 2025/26 tax year; anything paid above that allowance is taxable at your marginal rate.

If they died at 75 or older: whatever you withdraw is added to your taxable income for the year and taxed at your marginal rate — 20%, 40% or 45% (rates differ in Scotland). Because the tax follows your income, taking a very large slice in a single year could push you into a higher tax band, whereas spreading withdrawals across several years may keep the tax bill lower. This is exactly the kind of decision beneficiary drawdown gives you the flexibility to make.

With successor drawdown, the clock effectively resets: the tax treatment depends on the age at death of the most recent holder of the fund, not the original one. A pot can therefore move between tax-free and taxable treatment as it passes down through successive beneficiaries.

Your options as a beneficiary

Depending on the scheme, you may be offered one or more of the following:

• Beneficiary drawdown — keep the pot invested and draw flexibly. This preserves the tax wrapper and lets you control the timing of withdrawals (and therefore the tax).
• A lump sum — take the whole amount as cash. Simple, but the money leaves the pension shelter and, from 2027, may interact with inheritance tax (see below).
• A beneficiary annuity — use the funds to buy a guaranteed income for life. This trades flexibility for certainty.

Not every provider offers beneficiary drawdown, and the range of investments and charges varies. If your inherited pot sits with a scheme that only offers a lump sum, you may be able to transfer it to a provider that offers drawdown — one reason it can pay to compare drawdown providers before making an irreversible decision.

What changes in April 2027

This is the big one. From 6 April 2027, the Government has confirmed that most unused pension funds and death benefits will be brought within the value of the deceased's estate for inheritance tax. Today, pensions generally sit outside the estate for IHT, which is why they have been such a valued way to pass wealth on. That advantage is being significantly curtailed.

Some key points on the confirmed changes:

• Funds passing to a surviving spouse or civil partner remain exempt, as do those left to a registered charity.
• Death-in-service benefits paid from a registered pension scheme are excluded from the estate for IHT.
• Personal representatives (the executors) become responsible for reporting and paying any IHT due on the pension element.
• HMRC estimates that of roughly 213,000 estates with pension wealth in 2027/28, around 10,500 are likely to face an IHT charge as a result.

There is an important interaction to be aware of: where death occurs at 75 or older, a beneficiary may face inheritance tax on the pot and income tax when they draw it — two charges on the same money. How families plan around this will depend entirely on individual circumstances, and the detail is still bedding in. Our dedicated explainer on the 2027 pension inheritance tax changes goes deeper.

Putting it together

If you have inherited a pension, the practical questions are usually: how was it left to me, how old was the person when they died, do I want to keep it invested or take cash, and when should I draw on it to manage my own tax position? Beneficiary drawdown often gives the most flexibility to answer that last question sensibly — but it is not the only route, and the right balance is personal.

For the pension holder's side of the picture, see our guides on what happens to your pension when you die and the age 75 milestone for drawdown investors, which explains why that birthday matters so much.

Weighing up an inherited pot or your own retirement income? Use our drawdown comparison tools to compare providers, features and charges, or get in touch to be pointed toward regulated advice for your situation.