Which? explains income tax rules on inherited self-invested pensions ahead of 2027 changes

Reader’s question sparks guidance on pension inheritance

A reader from Hertfordshire, named only as Brian, has asked Which? to clarify what happens to income tax on a self-invested personal pension (SIPP) if he dies after April 2027, aged over 75, and his nominated beneficiary then dies before reaching 75. The question goes to the heart of how pensions can be passed down through more than one generation, and what tax, if any, applies at each stage.

Responding in Which?’s consumer advice column, money expert Joanne Padilla said inheritance tax rules on pensions are changing, but the separate rules on income tax are not. The two taxes are treated differently, and a change to one does not automatically alter the other.

How beneficiary drawdown works

According to Padilla, when the original pension holder dies, a nominated beneficiary has the option of continuing the pension as a beneficiary drawdown arrangement rather than withdrawing it in full. Crucially, that beneficiary’s own beneficiaries can then do the same thing again, taking the fund as a further beneficiary drawdown. This means a SIPP can, in principle, be passed down through successive generations rather than being cashed out on the first death.

Padilla also confirmed that these inherited drawdown plans can be transferred to a different pension provider, meaning the facility to keep passing on the fund is not tied to the original company the pension was held with.

Tax treatment depends on the age of the last owner

The central point in Padilla’s answer is that whether income tax applies to withdrawals depends on the age of the last person who held the pension when they died, not necessarily the age of the person taking the money out. Because of this, the same inherited pension fund can be taxed differently each time it passes to a new beneficiary on a further death, depending on how old that most recent owner was.

For Brian’s specific scenario, that means the tax position facing his beneficiary’s own beneficiary would hinge on the age at which his immediate beneficiary died, among other factors, rather than being fixed once and for all at the point Brian himself dies.

What happens next

Padilla’s answer confirms that, while planned reforms will change how inheritance tax applies to pensions from 2027, the existing income tax rules on withdrawals from inherited SIPPs remain in place for now. Which? said its Money 1-to-1 Guidance service, available to Which? Money members and their immediate family, offers unlimited sessions with its team of experts on questions covering pensions, tax, savings and scams, for readers wanting to work through how the rules might apply to their own circumstances.

No further detail was given in the response on the exact mechanics of the 2027 inheritance tax changes themselves, and readers with pensions affected by the shift are likely to be watching for further official guidance as the implementation date approaches.