Inheriting a UK Pension While Living Abroad: What Non-UK Residents Need to Know

If you or your beneficiaries live outside the United Kingdom, inheriting a UK pension can be a complex process. Many British expats and overseas beneficiaries find that their options are limited — and that planning ahead is essential to pass on wealth efficiently.

This guide outlines what non-UK residents need to know about inheriting a UK pension, including the available options, tax considerations, and new post-2024 rules.

Understanding the Type of Pension You’re Inheriting

The rules for inheriting a UK pension depend on:

• The type of pension scheme (defined benefit or defined contribution),
• The choices made by the deceased, and
• The specific rules of the pension provider.

This article focuses on defined contribution (DC) pensions, where the deceased had a personal pension fund rather than a guaranteed income.

Main Options for Inheriting a Defined Contribution Pension

When inheriting a UK defined contribution pension, the main options are:

• Beneficiary’s annuity (lifetime income)
• Beneficiary’s drawdown (flexi-access drawdown)
• Lump sum payment
• Or a combination of these

However, not all these options are available to non-UK residents.

Options and Restrictions for Non-UK Residents

For non-UK residents and British expats, choices are often restricted compared with those available to UK residents:

• Annuities are generally not available to non-UK residents through UK pension schemes.
• Drawdown may be limited because many providers now treat it as cross-border business and cannot maintain such arrangements with non-UK residents.
• A lump sum payment may therefore be the only realistic option in some cases.

Why Non-UK Beneficiaries Face Difficulties

Overseas beneficiaries often face several obstacles when dealing with UK pension providers:

• Many providers refuse to work with non-UK residents and non-UK financial advisers.
• Most UK-based advisers are unwilling to provide advice to clients living abroad.
• Increasingly, some pension companies will not communicate with non-UK advisory firms, even when the client has provided written authorisation.

These barriers can leave non-UK beneficiaries with limited support or clarity over their available pension options.

Can an Inherited UK Pension Be Transferred?

In many cases, transferring an inherited UK pension to another scheme is not allowed as part of the death benefit process.
Usually, the non-UK beneficiary must first enter a drawdown within the existing pension scheme.

If the scheme doesn’t offer a drawdown, the available options are:

• Taking a lump sum payment, or
• A dependant’s annuity (though this is rarely offered to overseas residents).

Some pension providers may allow what’s known as “blink-of-an-eye drawdown” — where the fund is briefly placed into drawdown, allowing a transfer to another provider that accepts non-UK residents.
However, this option depends entirely on the scheme’s rules and is not guaranteed.

Planning ahead is vital to ensure your beneficiaries can access your pension wealth efficiently and without unnecessary tax burdens.

Tax Implications When Inheriting a UK Pension

The tax treatment of inherited pensions depends primarily on the age of the deceased at the time of death:

• If the deceased was under 75:
• The inherited pension is generally tax-free in the UK (either as income or a lump sum).
• If the deceased was 75 or older:
• Any withdrawals are taxed as income at the beneficiary’s marginal rate.

For non-UK residents, both UK and local tax rules must be considered.Even when a pension is tax-free in the UK, it may be taxable in the country of residence. We’ve seen many cases where expat beneficiaries had to pay income tax locally on funds received tax-free from the UK — resulting in significant tax liabilities.

• From April 2027, UK pensions will also fall within the estate for UK Inheritance Tax (IHT)purposes, adding another layer of complexity. 

• Additionally, beneficiaries should review the new Lump Sum and Death Benefit Allowance (LSDBA)introduced in 2024, as this can affect how much can be paid tax-free.

LSDBA: The Lump Sum & Death Benefit Allowance

Since 6 April 2024, the former Lifetime Allowance (LTA) has been replaced by new limits on tax-free lump sums.
One key measure is the Lump Sum and Death Benefit Allowance (LSDBA).

• The standard LSDBA is £1,073,100, though it may be higher if the deceased had LTA protection or other enhancements.
• The LSDBA sets the maximum that can be paid tax-free on death (if the deceased was under 75) or through certain lump sums during life.
• Amounts exceeding the LSDBA are taxable at the beneficiary’s marginal income tax rate.
• Not all lump sums count toward the LSDBA — exclusions include small lump sums (under £10,000), charitable payments, and lump sums from funds crystallised before April 2024.
• The LSDBA is reduced by any prior tax-free lump sums or death benefits taken before 6 April 2024 under transitional rules.

Understanding how this new allowance applies is essential for accurate inheritance and tax planning.

Key Takeaways for Non-UK Residents Inheriting a UK Pension

• Check the pension type and confirm what options are available.
• Review the provider’s policies on cross-border arrangements.
• Assess tax implications based on the deceased’s age and the tax treaties between the UK and your country of residence.
• Seek professional cross-border financial advice to ensure compliance and efficiency.

Final Thoughts

Inheriting a UK pension while living abroad can be challenging. Regulatory restrictions, differing tax regimes, and post-Brexit complexities make early planning crucial.

Work with a qualified adviser authorised in both the UK and your country of residence, who understands the cross-border tax rules and pension legislation.

By preparing in advance, you can protect your beneficiaries from unnecessary taxation and ensure your pension wealth is passed on efficiently.