How would inheriting a SIPP work in practice?

zagfles

EdGasket wrote: »

OK, but that's hard to do if you have died!

Like a will - you should do it before dying!

Why don't they tell you about all this??

They should have done. Anyway you know now - so make sure you fill it in before dying!

What happens if no form has been filled in or the information on it is out of date because the beneficiary has also died?

The trustees will use their discretion. Most of the time it's obvious, eg if you have a spouse it will normally go to them, or if you don't then your children. But obviously complications can arise. I think sometimes they will use the will as a guide, or sometimes can even pay it to the estate (and potentially suffer IHT).

dunstonh

OK, but that's hard to do if you have died!

Which is why you do it before you die. However, trustees will still look the situation on death and make a decision without a nomination being present.

Why don't they tell you about all this??

They do. At least on the advised cases they do. I havent gone through a non-advised/DIY process so cant comment on them but I would expect it to be mentioned.

Triumph13

Can I just clarify something? The options that have been mentioned above seem to be (a) transfer it to a pension for the beneficiary(s); or (b) pay it to them subject to tax. What if the beneficiaries are below the age at which they could access funds in a pension and the funds are significantly more than you would want to have taxed in one tax year?
Eg you pop your clogs when your kids are early 50s, leaving a £400k SIPP to split between them. Is there a way they could use it to retire before the normal pension access date by drawing a taxable income each year from it until they are old enough to access their own pension funds, but avoiding paying the HRT that would be due if they drew it all at once?

zagfles

Triumph13 wrote: »

Can I just clarify something? The options that have been mentioned above seem to be (a) transfer it to a pension for the beneficiary(s); or (b) pay it to them subject to tax. What if the beneficiaries are below the age at which they could access funds in a pension and the funds are significantly more than you would want to have taxed in one tax year?
Eg you pop your clogs when your kids are early 50s, leaving a £400k SIPP to split between them. Is there a way they could use it to retire before the normal pension access date by drawing a taxable income each year from it until they are old enough to access their own pension funds, but avoiding paying the HRT that would be due if they drew it all at once?

They don't have to be over 55 to drawdown on it, they can be any age. If the deceased was over 75 they will be taxed on what they drawdown when they draw it at their marginal rate. If the deceased was under 75 it's all tax free.

System

zagfles wrote: »

They don't have to be over 55 to drawdown on it, they can be any age. If the deceased was over 75 they will be taxed on what they drawdown when they draw it at their marginal rate. If the deceased was under 75 it's all tax free.

Are you sure? If the deceased was under 75 a beneficiary could inherit a pension pot and then draw down from it for the rest of their life tax free?
That would be a most extraordinarily generous arrangement, and put the new pension owner in a uniquely privileged position compared with all other pension holders.

HappyHarry

Clifford_Pope wrote: »

Are you sure? If the deceased was under 75 a beneficiary could inherit a pension pot and then draw down from it for the rest of their life tax free?
That would be a most extraordinarily generous arrangement, and put the new pension owner in a uniquely privileged position compared with all other pension holders.

It does indeed. And the above post by zagfles is correct.

If the beneficiary in turn dies before 75, the same rules apply to their beneficiary too. In theory, the new pension reforms can be used as long term family wealth preservation tools.

This is one readon why the LTA is unlikely to be relaxed anytime soon.

System

HappyHarry wrote: »

This is one reason why the LTA is unlikely to be relaxed anytime soon.

How does that work? Doesn't the beneficiary get his own LTA, or is there an inherited LTA even after death?

cjking

If pension funds are transferred to a beneficiary pension account, do they then potentially pay income tax on withdrawals from what is now their own pension scheme? Assuming they also have their own pension savings, it must presumably become testable against their own lifetime allowance?

If someone inherits £1 million into their pension from each of their two parents, who both die after 75 while all funds are in drawdown, and the beneficiary has £1 million of their own pension savings, does that mean that potentially they have £3 million being tested against their lifetime allowance?

System

Good example. It's hardly a "lifetime" allowance if two of the people are dead.

HappyHarry

If pension funds are transferred to a beneficiary pension account, do they then potentially pay income tax on withdrawals from what is now their own pension scheme? Assuming they also have their own pension savings, it must presumably become testable against their own lifetime allowance?

If someone inherits £1 million into their pension from each of their two parents, who both die after 75 while all funds are in drawdown, and the beneficiary has £1 million of their own pension savings, does that mean that potentially they have £3 million being tested against their lifetime allowance?

Clifford_Pope wrote: »

Good example. It's hardly a "lifetime" allowance if two of the people are dead.

Good questions.

If the funds were in drawdown when the original pension holder died, then the funds have already been tested against the lifetime allowance, and will not be tested again against the beneficiaries' lifetime allowance.

Edit: [STRIKE]If the funds had not been previously tested, then they will be tested against the beneficiaries' Life Time Allowance.[/STRIKE]

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

Edit: My post above is incorrect. Please see post 29 below by PensionTech.