What happens to my pensions when I die

mayoumba

I've recently had a potentially life limiting diagnosis [~50/50 @5 years], so.............
I want to get my finances in order to ensure the ongoing comfort of my wife, henceforth known as the Merry Widow.

We have pensions that together would have given us a comfortable retirement. Her pension is a DB, mine 2 DBs and a number of DCs/SIPPs, including 1 in the PPF.
My DBs pay 50% spouse pension, but in 1, the spouse pension drops to £74pa if I die before normal retirement age c/w £2kpa if I die after normal retirement date.
Statistically I am more likely than not to die before NRD.

I've got valuations for the DBs and @ 50% spouse rates it seems daft not to take the money now, e.g the £74pa pension converts to ~£60k transfer value.

I've made an appointment to see an IFA to get the advice required for transferring out of the DB.

Just a couple of questions irrespective of whether the DB transfer goes ahead:
1. I understand my wife can inherit DC pension/SIPP cash pots tax free when I die . Does she inherit these as a pension pot, or just an amount of cash.
2. If she inherits them as a pension pot, does she retain the right to take a 25% tax free lump sum if I haven't already taken it.
3. When I spoke to the IFA on the phone they mentioned that if they were to transfer the funds they would put them in a 'trust' to take them out of probate(?). If this is a good idea, can I put my other SIPPs in a trust. If so how would I go about it.

Thanks in advance.

kidmugsy

What rotten news- best wishes.

The DC and SIPP pension pots become the merry widow's (assuming that you have nominated her - have you?). If you have died before age 75 she can draw out 100% tax-free, or leave as much as she likes in that tax shelter indefinitely. For example, if any is left when she dies that pension pot in turn can be passed to a child, grandchild, or whomever she nominates. That's assuming that the law on this matter hasn't changed.

I don't understand the probate point. The pensions are not part of your estate and can be passed to your widow long before probate would have been granted. Nor do I see any point in a trust for the SIPP: since they are not part of your estate there is no question of their being liable for IHT nor are they yours to dispose of by a will. Your choice is imposed - or, rather, requested - by your signing your nomination.

Perhaps it's possible for you to set up a lifetime trust and then to nominate it to receive the SIPP but that's just a guess - I have no idea whether it's possible. Nor do I know what advantage it might have.

In the past I've found some of the insurance company websites helpful. You might care to have a look at, for instance, Royal London or Legal and General.

Dox

mayoumba wrote: »

3. When I spoke to the IFA on the phone they mentioned that if they were to transfer the funds they would put them in a 'trust' to take them out of probate(?). If this is a good idea, can I put my other SIPPs in a trust. If so how would I go about it.

Ask the IFA what he's on about - and check you understand/agree with the answer before deciding to go with him as a client.

jamesd

CAUTION: if you move pension money to a newly opened pension and die within two [STRIKE]three[/STRIKE] years the money is subject to inheritance tax even though a pension is a trust! The money is still not part of your estate and not governed by your will.

[STRIKE]For this reason, any DB transfers you do should be to one of your existing DC pensions. If inheritance tax is a factor. You can open a new one recommended by an IFA but for inheritance tax protection shouldn't put much money in it until three years after opening it.[/STRIKE]

If an IFA suggests any trust arrangement ensure that they cover this and if they say it doesn't apply, say why.

kidmugsy

https://www.pensionwise.gov.uk/en/when-you-die

jamesd

The tax treatment for your wife or other beneficiaries depends on how old you are when you die.

If you are under 75 any amount can be taken out at any time tax free.

If you are 75 or older they can still take out any amount out at any time but it's added to their normal taxable income. Children have an income tax personal allowance and that can be used to make some withdrawing tax free.

Whether you have taken a 25% tax free lump sum or not makes no difference, it's just based on your age. There is no age restriction on taking this money, a newborn child can do it.

Newer pension products will put it in a "beneficiary pension" which works as I've described. Old ones might only have an immediate lump sum option.

If the wife dies while there's money in her beneficiary pension, her beneficiaries inherit it with the original tax treatment as a "successor pension".

If you are diagnosed as having a life expectancy of no more than twelve months you can also take out any amount at any age tax free. Whether you've already taken a 25% tax free lump sum makes no difference.

DC pension treatment on death is excellent.

For this post I've assumed that your pension combined value isn't over the pension lifetime allowance.

mayoumba

Thanks for all the answers.

This is a worry
v
v

jamesd wrote: »

CAUTION: if you move pension money to a newly opened pension and die within three years the money is subject to inheritance tax even though a pension is a trust! The money is still not part of your estate and not governed by your will.

For this reason, any DB transfers you do should be to one of your existing DC pensions. If inheritance tax is a factor. You can open a new one recommended by an IFA but for inheritance tax protection shouldn't put much money in it until three years after opening it.

If an IFA suggests any trust arrangement ensure that they cover this and if they say it doesn't apply, say why.

I've recently moved a DC pot to a SIPP - this was before I was ill.

My DB transfers will be below the IHT allowance of £325k, so would this mean IHT would not be taken from any transfers if I die within 3 years?
All my estate will go to my wife.

Are there any different rules that apply as I know I am going to die early opposed to someone who transfers a pension with no known health issues but dies within the 3 years?

The total of all my pension pots will be well below the lifetime limit.

Again, thanks. All the replies give me questions to ask the IFA.

westv

kidmugsy wrote: »

What rotten news- best wishes.

The DC and SIPP pension pots become the merry widow's (assuming that you have nominated her - have you?).

Doesn't a spouse automatically inherit a pension pot on the death of the other person - subject to necessary confirmation?

Silvertabby

westv wrote: »

Doesn't a spouse automatically inherit a pension pot on the death of the other person - subject to necessary confirmation?

Speaking from a (now retired) pensions administrators point of view, a clear 'expressions of wish' form makes it easier for them - and easier for the administrator means a quicker payment.

Yes, in the absence of a EOW form, the spouse should automatically inherit, but some people do live rather complicated lives.

HappyHarry

mayoumba wrote: »

Thanks for all the answers.

This is a worry
v
v


I've recently moved a DC pot to a SIPP - this was before I was ill.

My DB transfers will be below the IHT allowance of £325k, so would this mean IHT would not be taken from any transfers if I die within 3 years?
All my estate will go to my wife.

Are there any different rules that apply as I know I am going to die early opposed to someone who transfers a pension with no known health issues but dies within the 3 years?

The total of all my pension pots will be well below the lifetime limit.

Again, thanks. All the replies give me questions to ask the IFA.

It's two years not three - jamesd is usually very good in this area, so I presume it is a typo, (or I've missed something important!).

The rule is only about those in ill-health transferring benefits to another scheme. HMRC can view such transfers as a deliberate attempt to enhance death benefits and deprive HMRC of IHT, and so can make any pension transfers liable to IHT upon death within two years, even if it is a spouse benefiting from the proceeds.

With regard to the trust, I would assume that the IFA is talking about a pilot trust which can, under the right circumstances, help ensure that future generations benefit from your pension funds as you would wish. Though the pension reforms made some of this area invalid, it is still useful when dealing with people in their second marriages.

jamesd

HappyHarry wrote: »

It's two years not three - jamesd is usually very good in this area

Thanks for the correction! I was wrong and have edited my post.

mayoumba wrote: »

I've recently moved a DC pot to a SIPP - this was before I was ill.

First, please read the corrected version of my post.

Provided there is no change to your expression of wishes, neither the people nor the percentage split, that switch shouldn't be a problem unless the old one was say a section 32 plan with some sort of preserved extra benefit.

Similarly, if you didn't know you were ill at the time it won't be a problem even for section 32 or defined benefit transfers. Best to record the details now to make life easier for whoever handles your estate.

mayoumba wrote: »

My DB transfers will be below the IHT allowance of £325k, so would this mean IHT would not be taken from any transfers if I die within 3 years?
All my estate will go to my wife.

Are there any different rules that apply as I know I am going to die early opposed to someone who transfers a pension with no known health issues but dies within the 3 years?

It's whether your whole estate is over the threshold that matters, not just whether the transferred amount is. The two year issue only applies to people who know they are ill. If you weren't there would be no issue.

You can read much more about this at:

Pension transfers by those in ill-health
Inheritance tax on transfer of pension plans
This world we live in (Staveley case portion)
HMRC V STAVELEY, UPPER TRIBUNAL DECISION, JANUARY 2017

These issues have been quite prominent over the last few years so your IFA should be well prepared for dealing with the issues.

Regardless, the inheritance tax aspect shouldn't stop you from doing the transfer.