SIPP advice needed - death benefit

limited02

Ok, so following my dad's recent death, my mum is now going to inherit his sipp pension fund as his spouse. He took the maximum 25% lump sum when he retired meaning that he started in pension benefits. My understanding is that the fund can only be used under normal pension rules for my mum such as purchasing an annuity to provide her an income.
But, I can not find anywhere where it states what these rules are. She currently does not have her own sipp or private pension. She is 71 and gets her state pension but she and my father have always relied on rental income from properties outside of any pension scheme.
Can she use dad's sipp fund to start her own sipp. Can she buy an annuity using this fund but still take a lump sum even though the sipp where it came from had a lump sum previously. What exactly can she do with this fund?

mania112

There are 3 options:

1) A cash lump sum minus a 55% tax charge (no tax free cash at this stage)

2) Continue with a drawdown contract (which is what this SIPP is) but now the income is based on your mums age.

3) Purchase an Annuity for a guaranteed income for life.

... no tax free cash in any option. There's only one bite at that cherry.

The SIPP provider will be very helpful making the arrangements and it will be straightforward (which route is taken) assuming your father completed an expression of wish for the benefit of your mother.

jamesd

Yes, she can start her own SIPP. It's easy.

She can't take a lump sum, one has already been taken.

What sort of value does the pension pot have? £5,000? £50,000? £500,000? More? Once values start to get over about £50,000 or so it can pay for those who are not familiar with investments to consider paying an IFA for help.

Does she have an interest in the pension pot or some of it being inherited on her death? If she was to buy an annuity there would in general be nothing inherited after her death. If she was to use income drawdown - leaving the money invested and taking an income from the investments - then the remaining pot at the time of her death would be inherited subject to a 55% tax charge, but not included in inheritance tax calculations. Unless she was to remarry, then her spouse could inherit it just as she is doing, with no tax charge.

Given that they have relied on other income, my impression is that your dad might have been intending to exploit the avoidance of inheritance tax on pension pots, as a way for the money to be passed on outside the estate.

Does she have any need for income from this money? Is her health OK, anything significantly negatively affecting her life expectancy, which in normal good health would be perhaps half of women living more than 19-20 more years.

She's starting to reach the age where annuities can be a good deal, though that really starts to take off well over age 75, perhaps in the early 80s. But if there are negative factors reducing her life expectancy they could offer a good deal now, particularly if she doesn't want to see investment value ups and downs and doesn't mind spending the pot to buy an annuity, leaving the part spent gone from inheritance prospects.

limited02

Thanks for the responses. We are looking at over 500k in the pot. Myself and brothers were down as beneficiaries but when we learned of the 55% tax hit, we all refused knowing that our Mother could make more from it. She is not going to rely on the income but instead will probably use the income to set something for us in trust. What's the longest guaranteed deals? Who are good annuity providers? She smoked for 40 years but gave up 15 years ago. She also has to be monitored over her heart rhythm. Would she qualify for an enhancement?

dunstonh

. She is not going to rely on the income but instead will probably use the income to set something for us in trust. What's the longest guaranteed deals?

If she is not going to rely on the income, then why look at the secured pension option?

Would she qualify for an enhancement?

yes. Any local IFA is your best way to get the best enhanced annuity rates. However, what you describe doesnt sound like someone that needs a secured income option. Especially when you consider the different death benefits.

magpiecottage

This may not be straightforward.

First, although any funds already "crystallised" - i.e. have had the 25% cash stripped out or been used to take an income - cannot be taken tax free. Any that have not been can still be used (provided your father was under 75 at death).

Thus, if, say £50,000 cash had been taken and no income, that would equate to £200,000 crystallised (25% of which was cash) but leave £300,000 available as cash now.

In theory, this could be given to the children from the trust which legally owns the funds outside of the parents' estates to avoid inheritance tax.

If it does have to be taken as an income, it will be taxed as income.

However, if it is not needed to live on, mum could then give it to the children as a gift out of income that she does not need to maintain her standard of living. This would avoid eventual inheritance tax on it.

limited02

Someone has advised her to take an annuity for a guaranteed 10 years that should produce c. 50k a year (the fund us nearly 600k). She could then gift 2 properties to her sons (with equivalent values to the sipp fund) by way of compensation for us refusing to be beneficiaries. A guaranteed annuity would surely then mean that most of this large fund would be returned. I an awate that if she died within 7 years of the gifting, IHT would have to be paid but surely this would be a better rate than 55% and also the annuity would also still be producing income.

limited02

Thanks magpie and everyone else, a bigger sense of it is being created. It was the full 25% he took at the beginning though. The main thing is that he worked his !!!! off and suffered as a result. He was determined that this fund would make a difference to our lives which obviously it would so he wanted his sons which is why he made us beneficiaries. His spouse, our mother will do whatever needed to juggle assets for us to get as much if this fund as possible but it is working out the best way...

dunstonh

Someone has advised her to take an annuity for a guaranteed 10 years that should produce c. 50k a year (the fund us nearly 600k).

Its an option but why does she want a guaranteed income. It will be taxable. Bring her into higher rate tax and death benefits will only be if she lives less than 10 years.

The pension is outside of the estate. Why not keep it in the unsecured option?

limited02

Because she will lose income from the properties she gifts us - around 3k per month which is already taxable. The annuity income will replace this
So she won't actually earn much more per year. Her tax liability per year won't increase much at all. It's lose one and gain another but in the background, we have been gifted property equivalent to the beneficiary level of the sipp that we denounced.

dunstonh

Because she will lose income from the properties she gifts us - around 3k per month which is already taxable. The annuity income will replace this

income is income. Gifting is gifting. The only difference is the source.

Why give up the capital in the pension when the pension is already outside of the estate?