What is the two-year rule on pension death benefits?

For a pre-75 death, an uncrystallised-funds lump sum must be paid within two years of the date the scheme administrator first knew, or could reasonably have known, of the death to qualify for tax-free treatment, subject to the remaining LSDBA. A late lump sum is taxable. Unused uncrystallised funds designated to beneficiary drawdown have a separate two-year designation deadline.

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

An uncrystallised-funds lump sum loses the tax-free treatment that death before 75 would otherwise give. Paid to an individual in a qualifying capacity, it is pension income; paid to a non-qualifying recipient, such as a company or a trustee other than a bare trustee, it triggers the scheme administrator’s 45% special charge.

When does the 45% charge on death benefits apply?

For an uncrystallised-funds lump sum, it applies to a late pre-75 payment or a payment after death at 75 or older where the recipient is non-qualifying. That includes companies and individuals acting as trustees (other than bare trustees) or personal representatives. The scheme administrator pays it. A pre-75 lump sum paid within two years but above the LSDBA is instead pension income under s.637J(2), including for a non-qualifying recipient.

Death benefits and IHT · Paying death benefits

The two-year rule on pension death benefits

For an uncrystallised-funds lump sum after a pre-75 death, tax-free treatment depends on the two-year deadline and remaining LSDBA. The 45% special charge depends on the payment conditions and the recipient’s legal capacity.

4 min read · Last reviewed 1 Oct 2026

— In short

After a pre-75 death, an uncrystallised-funds lump sum is tax-free up to the remaining LSDBA only if paid within two years of the scheme administrator knowing, or reasonably being able to know, of the death. An LSDBA excess paid in time is pension income, including for a non-qualifying recipient. A late payment, or one after death at 75 or older, is pension income for a qualifying individual; a non-qualifying recipient instead triggers the scheme administrator’s 45% special charge. Beneficiary drawdown has a separate designation deadline.

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For an uncrystallised-funds lump sum death benefit after a pre-75 death, tax-free treatment depends on payment within two years and the remaining lump sum and death benefit allowance (LSDBA). A late payment becomes taxable. Whether income tax or the 45% special charge applies also depends on the recipient's legal capacity.

The rule: a two-year clock

Where the member dies before age 75, an uncrystallised-funds lump sum death benefit — and a designation of the member's unused uncrystallised 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.637J(3), (7); PTM073200). Settle the benefit inside that window and, for a pre-75 death, the lump sum is income-tax-free up to the remaining LSDBA. A designation to beneficiary drawdown is subject to its separate two-year rule.

If the member was under 75 when they died and the lump sum was paid within two years of the date the scheme administrator first knew of the member’s death, or if earlier, the date they could first reasonably have been expected to know of it, the lump sum will be tax free unless the payment exceeds the deceased member's available lump sum and death benefits allowance.

HMRC PTM073200

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. For an individual receiving the lump sum in a qualifying capacity, it is pension income at their marginal rate; for a non-qualifying recipient, the special charge below applies instead (ITEPA 2003 s.637J(3)–(6); PTM073200).

The 45% trap: paying a non-qualifying person

For an uncrystallised-funds lump sum, the 45% special lump sum death benefit charge applies where the payment is late after a pre-75 death, or follows death at 75 or older, and the recipient is non-qualifying. This includes a company, or an individual acting as a trustee other than a bare trustee, or as a personal representative. An individual receiving money in their own personal capacity is a qualifying recipient; being a natural person alone does not settle the test. The scheme administrator pays the special charge through the Accounting for Tax return (PTM073010).

A different rule applies where death was before 75 and the lump sum is paid within two years, but exceeds the remaining LSDBA: the excess is pension income under ITEPA 2003 s.637J(2), including for a non-qualifying recipient. The excess does not by itself trigger the 45% special charge.

Illustrative only — £400,000 uncrystallised-funds lump sum, paid late after a pre-75 death or after death at 75+, two routes

Taxable lump sum death benefit: £400,000
Paid to an individual in their personal capacity: Taxed as their pension income through the bands — about £166,000 with no other income (2026/27 rest of UK), £180,000 if already an additional-rate taxpayer
Paid to a discretionary trust (non-qualifying person): 45% special charge → £180,000, paid by the scheme administrator

Figures are illustrative, at 2026/27 rest-of-UK rates — run your own figures for the exact position. The 45% is paid up front by the scheme administrator. If the trustees later pay the money out to an individual beneficiary, that beneficiary is taxed on the gross amount and sets the 45% already paid against their own liability, with any excess repayable. HMRC describes the overall effect as tax at the individual's marginal rates (PTM073010). The difference is timing and who bears the charge in the meantime, while money kept in the trust stays charged at 45%.

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. For an uncrystallised-funds lump sum paid within two years, any excess is pension income under s.637J(2), including for a non-qualifying recipient. 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 and trust set-off) · ITEPA 2003 ss.637H–637N, 637S

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Common questions

What is the two-year rule on pension death benefits?: For a pre-75 death, an uncrystallised-funds lump sum must be paid within two years of the date the scheme administrator first knew, or could reasonably have known, of the death to qualify for tax-free treatment, subject to the remaining LSDBA. A late lump sum is taxable. Unused uncrystallised funds designated to beneficiary drawdown have a separate two-year designation deadline.
What happens if a death benefit is paid after two years?: An uncrystallised-funds lump sum loses the tax-free treatment that death before 75 would otherwise give. Paid to an individual in a qualifying capacity, it is pension income; paid to a non-qualifying recipient, such as a company or a trustee other than a bare trustee, it triggers the scheme administrator’s 45% special charge.
When does the 45% charge on death benefits apply?: For an uncrystallised-funds lump sum, it applies to a late pre-75 payment or a payment after death at 75 or older where the recipient is non-qualifying. That includes companies and individuals acting as trustees (other than bare trustees) or personal representatives. The scheme administrator pays it. A pre-75 lump sum paid within two years but above the LSDBA is instead pension income under s.637J(2), including for a non-qualifying recipient.

Sources

Based on HMRC’s Pensions Tax Manual (PTM073200, PTM073010) and ITEPA 2003 ss.637J, 637S.

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