Tax treatment for SIpp beneficaries

Alice_Holt

I have nominated my 2 neices as beneficaries of my SIPP.
I do not intend to draw on the SIPP (as I have sufficient pension income), the intention is that it will pass to my neices on my death and add to their pension provision.
(In addition to my SIPP, I am also contributing to pension plans in my neices own names / right)
I understand that if I die before age 75 no tax will be payable by my neices on the SIPP.
If I die after 75 then I understand (post April 2016) that my neices will be taxed at their marginal tax rate.

Does anyone know how this works in practice?
Would they receive a lump sum (after tax) ? I am presuming after my death the SIPP tax wrapper would dissolve, so could not be merged into their own pension plan?
Presumably (dependent on pension rules) they could put a lump sum into their pension plan and (in effect) reclaim the tax deducted from my SIPP.

kidmugsy

As far as I know the SIPP will be cut in two and each half attributed to one niece, and marked in some way to denote that she can withdraw from it tax-free (if you died before 75) or as tax-exposed (if afterwards). Each niece can keep hers invested as long as she likes.

OldBeanz

Is there any benefit in the OP drawing the 25% tax free now or certainly before death and investing the money in an ISA assuming there were no issues with inheritance tax? That would allow the beneficiaries to benefit from 25% being free of tax.

coyrls

OldBeanz wrote: »

Is there any benefit in the OP drawing the 25% tax free now or certainly before death and investing the money in an ISA assuming there were no issues with inheritance tax? That would allow the beneficiaries to benefit from 25% being free of tax.

I think an ISA only retains its tax free status if it is inherited by a spouse.

kidmugsy

coyrls wrote: »

I think an ISA only retains its tax free status if it is inherited by a spouse.

Quite, but that's not his point, which is that someone approaching 75 might usefully take the TFLS and then leave it to a beneficiary in the ordinary way, having popped it into an ISA in the meantime. If the settlor's estate escapes IHT then that 25% has reached the nieces without any tax taken off.

Whereas if the 25% had been left behind in the pension pot, then death after 75 would mean that that 25% would eventually be subject to tax when withdrawn. Unless a niece let it be and then herself died before 75 when (I assume, but am no expert) it could go to her beneficiaries tax-free.

Alice_Holt

Thanks for the replies.

My estate (currently) would incur substantial IHT (I've always been a saver rather than a spender, and old habits are difficult to break!).
So, I have been making gifts for a number of years - the pension provision held in my neices names being one such "gift" (ATS Sipp holding global investment trusts -Scottish Mortgage & Bankers). I envisage continuing to gift for the foreseeable future, and will leave a charitable legacy in my will (to my local CAB).

As the other Sipp held in my name is likely to incur a lesser tax charge on my death than if subject to IHT if held as an ISA etc, it seems reasonable to continue to place investments into it. It takes money out of my estate (for IHT) but still remains acessible to me (should I need it).

It is difficult to estimate how much I will need for my old age care in 15 years time or so - care costs are a lottery!

kidmugsy

Alice_Holt wrote: »

As the other Sipp held in my name is likely to incur a lesser tax charge on my death than if subject to IHT if held as an ISA etc, it seems reasonable to continue to place investments into it. It takes money out of my estate (for IHT) but still remains acessible to me (should I need it).

That's right:I'm pretty keen to avoid IHT, but am not prepared to do it in a way that alienates money from my widow; pensions fit the bill.

The great complications are (i) whether either of us will need care, and (ii) we can have no idea what the IHT laws will be when my widow dies: she's in good health, and women in her family live forever.

Alice_Holt

""The great complications are (i) whether either of us will need care, and (ii) we can have no idea what the IHT laws will be when my widow dies: she's in good health, and women in her family live forever."

Quite - And, of course, future pension legislation / tax treatment.
I'm single - so if I get my assumptions wrong, it will only affect me. However, life has a habit of surprising one, so things may change!

It was far simpler building up a capital sum from income, and then concentrating on growing that capital.

Now, that the possible life events / outcomes are diverse and complicated, successful financial planning seems more a matter of luck than judgement. One reason I like Sipps is the flexibility they now provide for pension / financial planning.

I'm not against IHT as a tax - but I would like to ensure my family / friends / favoured charities benefit first.

TH1878

Alice_Holt wrote: »

I have nominated my 2 neices as beneficaries of my SIPP.
I do not intend to draw on the SIPP (as I have sufficient pension income), the intention is that it will pass to my neices on my death and add to their pension provision.
(In addition to my SIPP, I am also contributing to pension plans in my neices own names / right)
I understand that if I die before age 75 no tax will be payable by my neices on the SIPP.
If I die after 75 then I understand (post April 2016) that my neices will be taxed at their marginal tax rate.

Does anyone know how this works in practice?
Would they receive a lump sum (after tax) ? I am presuming after my death the SIPP tax wrapper would dissolve, so could not be merged into their own pension plan?

A nominee pension would be set up where your pension fund would be assigned to the nominees. Just check with the SIPP provider that they allow Flexi-Access Drawdown on nominees pensions.

Your nieces probably won't want to draw it as a lump sum as they will incur a high tax charge (if you die after age 75) and lose the advantageous tax treatment (no income or capital gains tax) of the pension.

Statistically, you are likely to live longer than age 75 so you might want to consider making pension contributions on their behalf (whilst possibly drawing down the tax free cash). The contributions will be free of inheritance tax from day one, using the gift from income exemption or your annual gifting allowance, and they will be able to get tax relief even though you've paid the premiums.