My SIPP after me

zygurat789

I have two single daughters who do not have very good pension prospects and like all parents I would like to leave them something to remember me by. I have considered leaving them my SIPP, after my wife, for them to use as their own pension fund rather than withdraw the capital.
Is this idea feasible, would the SIPP have to be divided into two or could they share one fund?

jamesd

The SIPP would be divided into a piece for each of them. You don't have to divide it before death, it'll be handled automatically for you if you split who is to get it.

Once they inherit it they are free to take out the whole amount at any time if they wish. If you were to die before you reach age 75 they could take it all as a tax free lump sum or gradually tax free over as much time as desired. This would be the correct thing to do over time because they could then get tax relief paying the money into new pensions. If you die from age 75 onwards the money they take out is added to their normal taxable income and taxed accordingly.

You can try telling the SIPP trustees that you want the money paid into a discretionary trust so that trustees control when they can get the money. This is highly tax-inefficient unless they are already higher rate income tax payers and you die after age 75 because they lose the favourable tax treatment of inheriting a pension pot normally.

zygurat789

Thank you for your reply James.
The assumption is that both of us will die after age 75.
Does the SIPP have to be split?
I am trying to ensure that they use it as a pension and I do have a discourager up my sleeve if it could be a joint and holding, all to agree.
A trust sounds complicated and expensive for something they should be able to agree for themselves.

mania112

No, a pension can only be held in your own name, so can't be joint.

However they can't spend it until they're 55, so hopefully they'll be wiser by then?

mania112

EDIT: And i'm sure you can insist on your Will that the SIPP remains a SIPP for your beneficiaries and not cashed in?

HappyHarry

No! - The two previous comments are incorrect (sorry mania112!)

The beneficiaries of the SIPP do not have to be 55 to access it.

Your will does not impact on the SIPP. The SIPP is effectively held in a trust, and does not form part of your estate, so you wouldn't be able to put instructions in your will.

jamesd

zygurat789 wrote: »

The assumption is that both of us will die after age 75.

OK, then the income tax treatment will give them at least some incentive not tot take it all immediately.

zygurat789 wrote: »

Does the SIPP have to be split?

Yes after death if you want to split who it goes to. Each beneficiary will end up with a SIPP in their own name holding their portion. No need to spit it until then, you could have one with half a million to be split 50:50 and that split would be done after your death.

zygurat789 wrote: »

I am trying to ensure that they use it as a pension and I do have a discourager up my sleeve if it could be a joint and holding, all to agree. ... A trust sounds complicated and expensive for something they should be able to agree for themselves.

Sorry, I know of no way other than a trust to achieve this and a trust is probably more than makes sense since ultimately you do have to trust them in at least some ways. Only by using a trust can you insist that the money stays out of their hands and it can't stay in a SIPP if you do that, I think, because I don't think a trust is allowed to own a SIPP. Though I'm no expert in this area so if you really want to known consult a lawyer with knowledge in this area to see what is possible.

It is not true that they cannot access inherited pension money until age 55. They can do it on the day of their birth via their guardian if the timing of death and birth happen to be right. No age restrictions at all on when a beneficiary can get at the money, other than legal adulthood that can restrict decision-making to their guardian.

Even though a pension is not governed by a will, the pension trustees are likely to follow expressions of wishes that indicate that a trust should be used. They aren't strictly in law required to but if reasons are given they are likely to.

zygurat789

I wanted the pension to go to two of them but the capital to be for the three of them.
If I die after 75 and they aren't HR taxpayers in what way is it tax inefficient? (As in post #2)

Daniel54

jamesd wrote: »

Sorry, I know of no way other than a trust to achieve this and a trust is probably more than makes sense since ultimately you do have to trust them in at least some ways. Only by using a trust can you insist that the money stays out of their hands and it can't stay in a SIPP if you do that, I think, because I don't think a trust is allowed to own a SIPP.

This is correct,I believe.I have set things up so that the SIPP would be left into a discretionary trust for the benefit of spouse and/or children and/or grandchildren and/or further generations.

The proceeds of the SIPP can be passed into trust without IHT,but you are correct that the trust cannot thereafter hold a SIPP,so the trust is subject to pertaining trust taxation

Definitely something that requires a suitably qualified IFA and STEP solicitor

System

If you form a trust you can ask the pension trustees to pay the total pension pot into it after your death. This has always been possible - see Spousal Bypass Trust. The money leaves the pension wrapper and enters that of the trust.

But I don't think the new pension freedom allows a trust to continue to hold a SIPP as if it were a personal beneficiary, does it? I think only individuals can have a SIPP, not an impersonal entity such as a trust?
It would be fantastic if that were one of the new freedoms. Can an expert comment on that?

jamesd

zygurat789 wrote: »

I wanted the pension to go to two of them but the capital to be for the three of them.
If I die after 75 and they aren't HR taxpayers in what way is it tax inefficient? (As in post #2)

Discretionary trusts are mostly subject to top rate income tax, regardless of the income tax rate of the beneficiaries of the trust. It's more complicated than that in detail, see here. Interest in possession trusts are an exception where basic rate income tax may be due instead.

Daniel54 covers the needs, notably the professional advice it takes to get this sort of thing set up properly and with all features understood and tax bills minimised.

Other than a trust I know of no way to have pension income go to two people while the capital is split between three. It doesn't necessarily have to be a discretionary trust but a trust is needed. Depending on your specific intent an interest in possession trust, also called a life interest trust, might be suitable. This could allow two people to get the income while a third gets to live in a home, say, until they die, at which point the capital of the home passes to the other two. It's something that is sometimes used to protect a spouse while eventually passing the property to children.