Inheritance tax - pensions v individual savings account

What’s the differences between individual savings accounts and pensions when it comes to inheritance tax?
Key facts
  • Money held in an ISA forms part of the estate on death.
  • Pension funds are normally inheritance tax exempt on death.

Individual savings account (ISA)

Money held in an ISA forms part of the deceased person’s estate on death. If the money from the ISA is inherited by their spouse/civil partner no inheritance tax will be payable as it’s covered by the spousal inheritance tax exemption. However, it will form part of the spouse/civil partner’s estate on their death if any of the ISA money remains.

If the ISA money is passed to anyone other than the spouse/civil partner, such as an adult child, it will be included in the estate and may be liable for inheritance tax. If the estate is more than the inheritance tax nil rate band of £325,000, tax of 40% may be payable on any excess.


Pension funds are normally inheritance tax exempt on death if the scheme is written under trust (and most are) and the trustee/administrator has discretion on who to pay the benefits to. Certain plans can be subject to inheritance tax unless placed under trust, as these are paid directly to the estate or a named person, but if paid to the spouse/civil partner no inheritance tax will be payable as it’s covered by the spousal inheritance tax exemption. The following types of plans could be subject to inheritance tax:

  • Section 32 (buy-out plans)
  • retirement annuity contracts (Section 226)

However, if the 25% tax-free cash and other withdrawals have already been taken and not spent, they will be in the estate on death, and may be subject to inheritance tax.

If on death the benefits are held in a beneficiary/nominee drawdown plan, the benefits remain outside the beneficiaries/nominee’s estate.

Beneficiaries who continue with drawdown can nominate someone to receive the funds following their death, allowing the funds to pass through the generations while remaining in the pensions tax wrapper and therefore outside the survivor’s estate for inheritance tax.

Individuals in poor health could be subject to inheritance tax if they transfer their benefits to a new plan or they contribute to a pension, and they die within two years. More information can be found in our case studies How IHT might work on transfer (deceased estate tax).

Third party contributions to a pension can be used to reduce inheritance tax by reducing the value of the estate before death. The contributions are classed as gifts for inheritance tax, and the usual exemptions apply, so £3,000 can be paid as an exempt gift. If it can be shown regular contributions can be paid out of income without affecting the standard of living, they will be exempt.

If none of the exemptions apply and the individual survives for at least 7 years after making a contribution, that contribution will be IHT free as this is gift will be a potentially exempt transfer.

Further information


The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.