How would inheriting a SIPP work in practice?

EdGasket

I have read that any money left in a SIPP does NOT form part of one's estate for inheritance tax purposes which is great. However how does it work in practice if say one leaves ones SIPP to several children? Can they simply take it as cash even though they are not of retirement age or does it somehow have to be split into a pension for each child which they can't touch until they are 55 years old?

dunstonh

However how does it work in practice if say one leaves ones SIPP to several children?

Either a pension is set up for the beneficiary (and you can have a pension from the day you born) or it can be transferred into the pension of a beneficiary. If the pension holder was aged under 75, you would normally take it as cash outside of the pension for tax reasons.

Can they simply take it as cash even though they are not of retirement age

Yes. That is another option available to them. Although it may be taxed if they do that.

HappyHarry

If you die before 75 then usually the value can be handed out tax-free to the beneficiaries.

If you die after 75 then the value can be handed out, but is taxed as income received by the beneficiaries.

It is outside of your estate for inheritance tax purposes.

More details here:
https://www.gov.uk/tax-on-pension-death-benefits

Response crossed with dunstonh's post above.

System

HappyHarry wrote: »

If you die after 75 then the value can be handed out, but is taxed as income received by the beneficiaries.
.

I think that is only if the pension is in effect wound up and distributed?
I understood it could be left intact, as a pension now in the name of the beneficiary, which they can choose to draw from (taxed as income) or leave to grow (tax free) as they wish.

EdGasket

So would the SIPP company just sell up all the shares/bonds/funds in the pension and hand over the cash to the executor of the will tax-free if requested or is there more to it? Seems almost too good to be true to be able to get the entire pot out tax-free whereas the SIPP holder normally only gets 25% tax free.

dunstonh

So would the SIPP company just sell up all the shares/bonds/funds in the pension and hand over the cash to the executor of the will tax-free if requested or is there more to it?

No.
1 - it doesnt get paid to the executor as the pension is outside of the estate.
2 - If keeping it in the pension for the beneficiary is selected then either a pension can be set up for that beneficiary and the assets transferred (sometimes in-specie, sometimes sell and buy back) or the beneficiary may already have a pension or want a pension elsewhere so the pension value is transferred (as a cash transfer in most cases).
3 - if wanting it as cash in hand, then assets are sold and paid to the beneficiary directly.

Seems almost too good to be true to be able to get the entire pot out tax-free whereas the SIPP holder normally only gets 25% tax free.

It has been that way with most pensions since 1988. The way to the most out of a pension was to die the day before you retired. The pension freedoms improved it by making it tax free whether you had taken benefits or not if you die before 75. This also included all the new options on annuities which came in with the pension freedoms. Any lump sums they pay back on death would be tax free before 75 too.

zagfles

EdGasket wrote: »

So would the SIPP company just sell up all the shares/bonds/funds in the pension and hand over the cash to the executor of the will tax-free if requested or is there more to it? Seems almost too good to be true to be able to get the entire pot out tax-free whereas the SIPP holder normally only gets 25% tax free.

Yes although I think HMRC can investigate if they suspect people are using their pension to avoid IHT.

See http://citywire.co.uk/money/using-pension-to-dodge-iht-could-land-you-tax-bill/a813400

EdGasket

dunstonh wrote: »

No.
1 - it doesnt get paid to the executor as the pension is outside of the estate.

I don't understand how it works then. When one dies, one has an executor to execute the will and pass on one's estate to the beneficiaries in the will. How will the pension company know what is in the will if they aren't dealing through the executor?

I have no 'will' arrangements specifically attached to my SIPP pension; should I have?

zagfles

EdGasket wrote: »

I don't understand how it works then. When one dies, one has an executor to execute the will and pass on one's estate to the beneficiaries in the will. How will the pension company know what is in the will if they aren't dealing through the executor?

I have no 'will' arrangements specifically attached to my SIPP pension; should I have?

They will use an "expression of wish" form, your SIPP provider will give you one or can probably download one from their website.

dunstonh

When one dies, one has an executor to execute the will and pass on one's estate to the beneficiaries in the will.

That is correct. The executor handles the estate.

How will the pension company know what is in the will if they aren't dealing through the executor?

The pension is not part of the estate. So, the executor has no responsibility.

Pensions allow you to nominate a beneficiary/give and expression of wish. It is not a binding nomination. If it was then IHT could become involved. However, trustees rarely override the expression of wish. Mainly as most nominations are sensible and logical.

EdGasket

zagfles wrote: »

They will use an "expression of wish" form, your SIPP provider will give you one or can probably download one from their website.

OK, but that's hard to do if you have died! Why don't they tell you about all this?? What happens if no form has been filled in or the information on it is out of date because the beneficiary has also died?