Leaving your pension to your family? A little-known Budget change could make a difference

A small but welcome Budget announcement could make life easier for families inheriting a pension, by removing a tax deadline that could previously leave beneficiaries with an unexpected bill.

When you die, your pension savings may be passed on to your chosen beneficiaries. Depending on your age when you die and the type of pension you have, these payments may be tax-free or subject to Income Tax.

However, there was previously an important deadline that families needed to be aware of.

If you died before the age of 75, certain pension death benefits could normally be paid tax-free, provided you had sufficient unused lump sum and death benefit allowance. But your pension provider had to pay the money, or arrange for it to be moved into a beneficiary’s drawdown pension, within two years of learning about your death.

If this deadline was missed, the money could become taxable, even if the delay was outside your family’s control.

A note on the age-75 distinction: That’s important because where someone dies before 75, pension death benefits can generally be paid tax-free if the relevant allowance conditions are met. Where someone dies aged 75 or over, beneficiaries will generally pay Income Tax on taxable pension withdrawals.

What’s changed?

In the Budget, the Chancellor confirmed that the current two-year rule would be abolished.

The change applied to payments made from 28 October 2026 – so effective immediately – meaning beneficiaries will no longer face an Income Tax bill simply because the pension provider takes more than two years to deal with the death benefits. That’ll be a welcome relief to many bereaved families.

The change also covers certain payments from inherited pension drawdown funds and annuities.

Importantly, this doesn’t mean all inherited pensions will automatically be tax-free. The usual rules still apply, including the distinction between someone dying before or after their 75th birthday. The relevant tax-free allowances must also be available.

What does this mean for Inheritance Tax?

There’s another important pension inheritance change on the horizon. This one was announced in Rachel Reeves’ 2025 Budget.

From April 2027, most unused pension funds and pension death benefits will be included in someone’s estate when calculating Inheritance Tax. This means some families could face an additional tax bill when inheriting a pension, even where the pension money itself would otherwise be free from Income Tax.

The removal of the two-year rule is therefore welcome, but it doesn’t undo the upcoming changes to Inheritance Tax. We’ve explained more about that change here.

What can you do?

If you want your pension savings to benefit your family when you die, it’s important to check that you’ve notified your pension provider of who you want to receive them. Most providers will ask you for this information when setting up a new qualifying pension. But if you can’t remember doing it, log on to your pension portal or contact your provider to check. You can also change your nominated beneficiaries whenever you want. So make sure the names you have provided reflect your current wishes.

Please note: This article is for educational purposes only and isn’t personal financial advice. The value of investments can fall as well as rise and you may get back less than you put in. Past performance is not a reliable guide to future returns.