Death before vesting pension

westy22

A morbid subject but best to plan! I have a reasonably substantial SIPP and, as I run my own business, have no intention of going into drawdown for the foreseeable future (even though I am 58 now).

I have a 14 year old daughter, am divorced and have no current partner. All I have accumulated will go to my minor daughter. I have registered her as the beneficiary with my SIPP provider and I have a will leaving everything to her.

1. If I were to die before vesting the SIPP what would actually happen to the fund? Would it pay out to her as a lump sum immediately; a lump sum into her pension and not be available to her till she was 55 (or later); or pay her an annual income immediately?

2. Does the situation change when she reaches 18?

3. Would she incur a tax charge or Inheritance Tax on the fund?

I know some will think that I am doing her no favours leaving her a substantial inheritance, but that is another subject!

Thanks for all replies.

kidmugsy

Consider using a trust with her, and her eventual children and husband, as beneficiaries. Choose family members as trustees (brother, sister, even your ex). When you get the trust drawn up, get the solicitor to explain to you how to get the unvested pension money (lump sum) paid into it (or a companion one) free of IHT.

kidmugsy

If there are no suitable family members, or suitable friends, you may have to grit your teeth and pay for professional trustees. So be it.

jamesd

You've acted correctly with regard to the SIPP. Since she's a minor you can expect that a trust would be established that would pay out to her but in trust, to be drawn on by whoever cares for her, in her interest. When she reaches 18 she'd take full control.

Payments from pensions held in trust are outside your estate. You do need to check that the company running your SIPP operates it as a trust but it's very likely that it does. The trust status give the trustees the freedom to decide who gets the money (they will follow the expression of wishes form unless you do something like remarrying) and lets it avoid inheritance tax.

I'm assuming that she's also named in your will if you want her to receive anything else. If not, you should read the rules on intestacy to ensure that they will do what you want.

As well as no IHT, there's no tax on a pension pot before you've taken benefits. After you do that there's no income tax if the money is paid into a pension pot but 55% if it isn't. Life assurance is the best way to make up the difference if you don't want to delay taking benefits now.

There are some significant benefits to you starting to take the pension income and lump sum now:

1. The pension lifetime allowance percentage used is calculated on the value at the time you first take benefits from the pot. The sooner you do it, the lower the percentage used.

2. You can take the income and pay it into another pension. I'll assume that you're eligible for tax relief on the money. For each £100 taken as income you can pay £100 into a pension pot and break even so far in tax. But then you can take another 25% tax free lump sum. So you've reduced the tax from 20%, 40% or 50% of 100 to 20%, 40% or 50% of £75,

3. The benefit of 2 is greater if you pay via salary sacrifice from your business, using the pension income to keep your income stable. The extra potential gain is NI saved by salary sacrifice.

4. Money pad out to her from your normal income that doesn't affect your own living standards is free of inheritance tax. The pension income could be paid to an account in trust for her. She doesn't even have to know that the account exists.

I'm not greatly keen on having family members as trustees. More chance of emotion and personal preferences being involved than having a professional do it.

There's also some potential value in handing her some money to invest so she can learn about that, if she's interested or becomes so. Adding the income generated to her spending budget so she can learn to live on that and learn about the benefits of not touching capital might be interesting.

westy22

Thank you both for your views - I shall look into forming a trust and will also investigate the potential benefits for recycling pension income.

CannySaver_2

jamesd wrote: »

There are some significant benefits to you starting to take the pension income and lump sum now:

To give a balanced view there are some significant disadvantages, for example a 55% tax charge on lump sum death benefits, potentially higher charges, potential erosion of the personal allowance.

The Canny Saver

jamesd

CannySaver wrote: »

To give a balanced view there are some significant disadvantages, for example a 55% tax charge on lump sum death benefits

That's why I mentioned it and the use if life assurance if it was desirable. There isn't a tax charge on a lump sum paid into a pension pot after death but that's less likely to happen when the beneficiary is 14, so life assurance would be a good idea.

CannySaver wrote: »

potentially higher charges

Little potential to it. At a minimum there will be periodic GAD calculation charges, costing perhaps £150-200 once every three years. Possibly more from expensive providers.

CannySaver wrote: »

potential erosion of the personal allowance.

Whose? How is it a disadvantage or advantage?

Westy22 clearly is using all of the personal allowance already so there's no scope for erosion there. The daughter could have some of her personal allowance used if she was provided with some taxable income from the transferring of investments to her early. But as a daughter her income might well end up counting for the parent who gifted the money. Depends in part on how, if a trust was used and which type of trust. That's an area where professional advice should be sought.

CannySaver_2

jamesd wrote: »

Whose? How is it a disadvantage or advantage?

If the OP's income is taken above £100,000 then the personal allowance of £7,475 will be reduced by £1 for every £2 over the £100,000 figure.

jamesd

Thanks. That's possible. The effect is eliminated by paying the money into a new pension pot, assuming that there's pension contribution allowance still available.