What happens if a death benefit is paid after two years?

It loses the tax-free treatment that death before 75 would otherwise give. Paid to an individual, it is taxed as their pension income at their marginal rate; paid to a non-qualifying person such as a trust or company, the scheme administrator pays the 45% special lump sum death benefit charge.

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The two-year rule on pension death benefits

A lump sum death benefit after a pre-75 death is income-tax-free only if it is paid in time. The two-year clock, what starts it, and the 45% charge that lands when a benefit is paid late or to the wrong recipient.

Based on HMRC’s Pensions Tax Manual (PTM073200, PTM073010, PTM173000) and ITEPA 2003 ss.636A, 636AA.

6 min read · Last reviewed 19 Jun 2026

— In short

The two-year rule means a lump sum death benefit after a pre-75 death is income-tax-free only if it is paid or designated within two years of the scheme administrator knowing, or reasonably being able to know, of the death. Paid after that window it becomes taxable, even though death was before 75. A taxable lump sum paid to a non-qualifying person, such as a trust or company, instead suffers a flat 45% special charge, which the scheme administrator pays.

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Death before 75 usually makes a pension death benefit income-tax-free. The relief carries a deadline. A lump sum has to be paid in time; a benefit left undistributed turns into a taxable one, and one paid to the wrong kind of recipient attracts a flat 45% charge.

The rule: a two-year clock

Where the member dies before age 75, an uncrystallised-funds lump sum death benefit — and a designation of funds to beneficiary drawdown — is free of income tax only if it is paid or designated within two years. The clock does not start at the date of death. It runs from the date the scheme administrator first knew, or could reasonably have known, of the death (ITEPA 2003 s.636AA). Settle the benefit inside that window and, for a pre-75 death, it reaches the beneficiary income-tax-free.

For a member who dies before age 75, the lump sum death benefit is tax-free if paid within the two-year period; if paid after the end of that period it is taxable.

HMRC PTM073200 / ITEPA 2003 s.636AA, summarised

Miss the window and the pre-75 advantage is lost: the lump sum becomes taxable, the timing rule overriding the age rule. Death at or after 75 is taxable either way. The benefit is the recipient’s pension income at their marginal rate, and the two-year point does not make it tax-free (PTM173000).

The 45% trap: paying a non-qualifying person

A death benefit can also be taxed at a punitive flat rate. Where a taxable lump sum death benefit is paid to a non-qualifying person — anyone not receiving it as an individual, such as a trust, a company or the estate’s personal representatives — the special lump sum death benefit charge of 45% applies. The scheme administrator, not the recipient, is liable, and accounts for it through the Accounting for Tax return (PTM073010).

Illustrative only — a £400,000 taxable lump sum, two routes

Taxable lump sum death benefit: £400,000
Paid to an individual beneficiary: Their marginal rate (e.g. 40% → £160,000)
Paid to a trust (non-qualifying person): 45% special charge → £180,000

Figures are illustrative and rounded to show the shape of the charge — run your own case for the exact position. They make the planning point plain: a death benefit routed through a trust can carry a higher, scheme-administrator-borne charge than the same benefit paid to an individual.

How it sits with the other tests

The two-year rule is about income tax. For a pre-75 death it sits alongside the lump sum and death benefit allowance test — a tax-free lump sum is still measured against the £1,073,100 LSDBA, with any excess taxed at the beneficiary’s marginal rate. That test is on the LSDBA calculator and in the LSDBA explainer; the age-75 line and the coming inheritance-tax change are in pensions, death benefits and inheritance tax.

For planning and illustration only. This guide states the rules; it is not financial, tax or estate-planning advice and recommends no course of action.

PTM073200 (two-year rule) · PTM073010 (45% special charge) · ITEPA 2003 ss.636A, 636AA · PTM173000

Common questions

What is the two-year rule on pension death benefits?: Where a member dies before age 75, a lump sum death benefit (or a designation to beneficiary drawdown) is free of income tax only if it is paid or designated within two years of the scheme administrator becoming aware of the death. Paid after that two-year window, it becomes taxable even though death was before 75.
What happens if a death benefit is paid after two years?: It loses the tax-free treatment that death before 75 would otherwise give. Paid to an individual, it is taxed as their pension income at their marginal rate; paid to a non-qualifying person such as a trust or company, the scheme administrator pays the 45% special lump sum death benefit charge.
When does the 45% charge on death benefits apply?: When a taxable lump sum death benefit is paid to a non-qualifying person — broadly anyone not receiving it as an individual, such as a trust, a company or the estate’s personal representatives. The scheme administrator is liable for the 45% charge and reports it on the Accounting for Tax return.

Sources & grounding

Two-year rule: where the member died before age 75, an uncrystallised-funds lump sum death benefit (and a designation to beneficiary drawdown) is income-tax-free only if paid/designated within two years of the date the scheme administrator first knew, or could reasonably have known, of the death; paid after that window it is taxable (ITEPA 2003 s.636AA; PTM073200). Death at/after 75: the lump sum is taxable as the recipient’s pension income at their marginal rate regardless of timing (PTM173000).
Primary sources:PTM073200 PTM173000 ITEPA 2003 s.636AA
Special lump sum death benefit charge: a taxable lump sum death benefit paid to a NON-qualifying person (a trust, company, personal representatives — anyone not receiving it as an individual) suffers the special charge of 45%, for which the scheme administrator is liable and accounts via the Accounting for Tax return (PTM073010). Verified against gov.uk PTM073010 (2026-06-19).
Primary sources:PTM073010
Illustrative figures only: the £400,000 fund and the £180,000 (45% × £400,000) figure are clearly-labelled illustrations of the rule arithmetic — there is no public calculator for the special charge. The pre-75 lump-sum LSDBA test that can ALSO apply is engine-backed and links /calculators/lsdba (the £1,073,100 standard LSDBA, FA 2024 Sch 9).

For planning and illustration purposes only. Verify all inputs against source documents. This explainer does not constitute financial or tax advice.

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