SIPP advice needed - death benefit

limited02

It basically amounts to two things. Accept a beneficiary share and lose 55% or find a more beneficial route. What would you do? The properties will one day fall to us anyway. This way, 7 years down the line, the initial gift would be free from tax liability and our Morher would have produced much more from the sipp through an annuity than we would have less the 55%. She would have lost the rent from the properties replaced by the annuity income. A 10 year guarantee would then provide at least another 3 years payout. Hopefully she would live longer and it still be producing more. As I said, the only other option is for us to take cash less 55% - unless I'm missing something...

dunstonh

55% is higher than 40% IHT but higher than getting nothing.

jamesd

At the time your father made the original expression of wishes it is possible that the tax charge was 35% rather than the current 55%. Depends on just when it was done. If it was done at the time it would have been 35% then that would have been more tax-efficient than inheritance tax.

Now, it seems best for your mother to ask the pension company to defer while she gets professional advice from an IFA, found via unbiased.co.uk if she doesn't know one. Should ensure it's one offering full rather than limited advice.

The focus on an annuity bothers me because it's likely to be the wrong choice. Assuming she was to use income drawdown she could expect to be able to take at least £50,000 a year for reasonable life expectancies, with the remainder at her death inheritable. With the annuity option there is no remainder, so it's effectively throwing money away.

For drawdown £20-30,000 a year is reasonably likely to be sustainable indefinitely without capital loss. Drawing on the capital gradually tops that up to £50,000 easily enough. Perhaps, later or now, with some gradual purchasing of annuities, exploiting the way they pay out more at older ages.

Note though that the current GAD limit on capped drawdown restricts a 71 year old to £42,600 at the moment. As gilt yields increase (presumably, it's likely) and as she gets older that can be expected to increase. If she needed £50,000 she could do some annuity buying and some drawdown.

So from the look of it she could do a drawdown and gradual buying of annuity approach (they pay more as you get older) and get at least comparable income with higher inheritance provision.

I also wonder about the £50,000 annuity income because what I see for a 71 year old with no ill health is 7,6,16 per year per hundred thousand spent. That's for a level annuity paid monthly with no spouse and a particular postcode that could affect the result.

jamesd

Perhaps also worth noting that she could probably easily arrange to qualify for flexible drawdown by arranging to have £20,000 of state pension and annuity income. That would allow her to take unlimited income from the pension pot in drawdown, taxed as normal income.

For basic rate income that'd be taxed at 20%, else 40% assuming she didn't go into top rate. This way she could perhaps take the money and gift it to you two. This doesn't look as favourable as some options but it's an option.

It might be more favourable than gifting properties, depending on the tax due on their transfer to you at current market value.

margaretclare

limited02 wrote: »

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?

I only learned about the 55% tax quite recently, up to then I'd intended my eldest GD to be the beneficiary of my SIPP. Thanks to people on here, I found out, and now my DH will inherit my SIPP if I predecease him.

What happens with mine is that every year the SIPP provider does a reassessment (which they're obliged to do by law, and which I pay for) setting out all the options, all the what-ifs, if I convert the fund to an annuity, if I don't but leave it in drawdown. I can even opt not to take an annual drawdown if I find I don't need it - some years I've done just that, especially when it wasn't growing so well, stock market low.

It's meant to be an extra pension which can be inherited by the spouse.

Well done to Mum for packing in the smoking habit. There are statistics - she has probably extended her life by more than the 15 years since she gave up. What's the concern about her heart rhythm? I myself had a myocardial infarction in 1989 but have had no problems at all in the intervening years. If I'd been a smoker it could all have been so different. Mum will probably live another 20 years with improved health, and I hope she does. I hope she'll enjoy her money, not worry about giving it all away just yet.

limited02

The trouble is, she is well into the 40% tax bracket already with her income from rentals being around £6000 per month. Any drawdown will be charged at 40% anyway. The thinking on the property gifting would be that her income would remain roughly the same or possibly more with an annuity income replacing the lost rent. IHT would not become payable on these properties after 7 years which is an extra bonus although on the gifting we would lose around 10% of the value in CGT (after fees and purchase price have been taken into account), which is still a lot better. In effect, the property gifting surely must be the better option - anything else loses a minimum of 40%.

limited02

I have had a thought. the commercial properties she owns outside of the SIPP add up to a good £600,000. If she takes my fathers sipp fund and transfers it To a sipp herself, she can then sell them to the sipp fund can't she? The rents equate to about £30,000 per year before tax. If this then went to the sipp, she could then take her maximum draw down and get about the same after tax. This would actually make her better off! She would then have the £600,000 cash to gift surely??

jamesd

Yes, a SIPP can buy the commercial properties and it's quite common to do that. Not all SIPPs will allow it but there are many that will. And yes, she would then have the £600,000 cash to gift. This option seems like a better idea than gifting the properties, since the costs come out of the pension and it avoids you then selling to get the cash. A SIPP can even borrow up to 50% of the SIPP value for such things.

But I still think that an IFA should be consulted by her, with her objectives (which probably do include significant inheritance tax thoughts) before she takes the money. Quite likely to be best for her to take it but still best to preserver the option until after advice.

I also wonder just how well provided for she is on the income front and whether it's sensible for her to start gifting other things anyway, if she knows that she has ample income.

kyleapt342

Hi there

Unfortunately I didn't have time to read the whole thread as I'm at work, for a SIPP provider funnily enough haha. Won't dare mention the name though as that would be frowned upon.

You seem to have a couple of options in my view;

Flexible Drawdown could be one of them, if you can get £20k secured as income (only certain types of income qualify, annuity/state pension etc anything that cannot stop basically) then you can drawdown the full fund anyway.

Also in relation to the various commercial properties you hold OUTSIDE of the sipp, these could be sold to the sipp to gain tax relief on top of the sale price. One thing to keep in mind with a sipp is that you don't pay income tax or CGT when selling BUT you will pay CGT on inception if you made a gain. Could be an interesting little setup in some very unfortunate circumstances.

Kyle