Pension death benefits – taking income, explained

When pension death benefits are paid to a dependant, nominee, or successor, they will have the choice of whether they take the benefits as a death benefit lump sum, or use the funds to provide a pension income.

As part of our Bitesize Technical series, Senior Technical Consultant Lisa Webster looks at the income options for taking death benefits from defined contribution pensions, and how they are treated for tax.

Please note: These are the current rules for pension death benefits. Changes to the tax treatment are due to come into force from 6 April 2027.

Key insights on taking pension death benefits as income

Options for taking pension income

Death benefits paid from a defined contribution pension can be used to purchase an annuity, or transferred to a pension scheme in the beneficiary’s name as beneficiary’s flexi-access drawdown.

This could be paid into a new pension or transferred into an existing pension plan they already hold. Any beneficiary’s drawdown will always be ring-fenced from any member benefits they have, and it can be accessed at any time – they do not have to wait until normal minimum pension age.

This means the death benefits can be kept in the pension tax wrapper indefinitely, and just withdrawn as needed.

How is the pension income taxed?

Where the member died before age 75, any withdrawals from the beneficiary’s drawdown will be tax-free. There is no test against the deceased’s lump sum and death benefit allowance, and no upper limit to the amount that can be passed on.

The only caveat is the death benefits must be put into the beneficiary’s name within two years of the date the scheme administrator knew, or should reasonably have known, of the member’s death.

If the member died at or after age 75, any withdrawals made from the beneficiary’s drawdown fund will be subject to income tax.

What are the advantages of taking death benefits as income?

Having the option of taking death benefits as a pension can make a big difference, especially to larger funds. The ability to keep funds in a pension tax wrapper until needed, and manage taxable withdrawals within tax bands, can make a significant difference to how much tax beneficiaries need to pay.

It’s important to keep nominations up to date, so beneficiaries are eligible as dependants or nominees.

More Bitesize Technical

Hungry for more information? Then watch ‘Lump sum death benefits, explained’ – the previous instalment of our pension death benefits Bitesize Technical series.