Inherited a UK pension while living in Spain?

Why a Beneficiary SIPP could save you a very large tax bill

When a loved one passes away, dealing with their pension is rarely the first thing on your mind. For British expats in Spain, though, the decision you make about an inherited UK pension can be one of the most financially significant you will ever face. Receive this the wrong way and you could hand a large share of it to the Spanish tax authorities; handle it well and it can keep working for you, and for your family, for decades.

What is a beneficiary SIPP?

A beneficiary SIPP is a pension account that lets you keep an inherited UK private pension invested ‘as a pension’, instead of ‘cashing it in’. Depending on the provider, it can also be called beneficiary drawdown, inherited drawdown or a beneficiary’s flexi-access drawdown plan.

Once the pot is in your name as beneficiary, you can:

• Leave it invested as a pension, where gains are not taxable until accessed
• Choose your own investments/strategy alongside financial advice
• Take income or lump sums as and when you wish, rather than all at once
• Nominate your own beneficiaries, so that the pot can be passed on again (successor drawdown)
• ONLY a non-UK regulated financial adviser can help you set this up if you are a Non-UK tax resident

You are not forced to take the money; you choose when and how much to take. Most importantly, there is normally no income tax to pay on receiving the inherited pension this way.

Because you are in essence receiving this money ‘all at once’, the whole sum lands in one tax year, pushing you up into the highest tax bands. On a six-figure pension pot, the difference between the top rates and a carefully managed alternative can run to tens of thousands of euros.

Depending on the inheritance tax the ‘Estate’ paid in the UK (a deceased person’s estate, not the individual, is taxed in the UK) and the inheritance tax rules in Spain, there may already have been a substantial amount of tax to pay on inheriting the pension. By paying even more tax on receiving this as a one-off lump sum payment, rather than setting up a ‘beneficiary pension’, the percentage of tax paid could end up being the majority of the pension amount you inherited. See the example below for an inherited UK pension for a Spanish tax resident (not regionally adjusted):

On top of all this, if you are a non-UK tax resident and you haven’t paid any tax in the UK for a while, you will most likely be taxed on this money through an ‘emergency’ tax code by HMRC at a rate of 40%, to make matters even worse.

Why a beneficiary SIPP can be so much more efficient

1. You control the timing. Leaving the pot as a pension means no lump sum triggers a large Spanish tax charge in one year. You can draw down gradually, in amounts that keep you in lower tax bands, and plan around other income, retirement or a move.
2. Tax-free growth inside the pension. While the money stays invested, any gains within the pension are not taxed. You are not paying annual tax on dividends, interest or gains on the pot while it grows.
3. Potentially no UK tax on the way out. Where the pension holder died before age 75, withdrawals from an inherited UK pension are generally free of UK income tax, provided the payment is within the available limits (the Lump Sum and Death Benefit Allowance, currently £1,073,100). Where death occurred at 75 or over, withdrawals are taxed in the UK at the beneficiary’s marginal rate, which is another reason to take advice before you act.
4. Flexibility for the next generation. Unused funds can often be passed on again, although the relevant inheritance tax in your Spanish region will also need to be taken into account.

The right outcome for you depends on your circumstances, your region of residence, and the Spanish tax treatment of the death benefit itself, which we would always confirm with specialist Spanish tax input before any decision.

The April 2027 UK pensions inheritance tax change you need to know about

From 6 April 2027, the UK is bringing most unused pension funds and death benefits into the scope of inheritance tax. The change is confirmed in the Finance Act 2026. In some cases, beneficiaries could face inheritance tax on the pot and income tax on withdrawals. Where the pension holder dies after that date, the structure and timing of what you inherit matters even more. If you are a pension holder yourself, it is also a good moment to review your own death benefit nominations.

Why speak to a specialist?

Cross-border pensions sit where two tax systems meet, and getting it wrong is expensive. Before you do anything with an inherited UK pension, you should consider:

• The age of the deceased at death, and what this means for UK tax
• Whether the pension is a UK scheme, and which provider and type of plan holds it
• Your Spanish tax residency and region
• How to draw income in a way that is tax efficient in Spain
• Your own estate planning, on both sides of the border

I work with British expats across Spain on exactly these questions, from International SIPPs to Spanish tax compliance and inheritance planning. If you have inherited a UK pension, or expect to, please get in touch before you request a payment from the provider. Once a lump sum has been paid out, it cannot be undone.

* Tax calculations are estimates and intended for general guidance only.