Inheriting a SIPP - tax and LTA

mightbedave

I understand that when someone dies aged under 75 the beneficiaries can take the entire contents of a SIPP as a tax free lump sum, assuming that the deceased was below their lifetime allowance on death. I have a couple of questions on tax if the beneficiary leaves the pension invested in a draw down scheme.

Can income be drawn on the pension tax free from day one and forever even if the beneficiary is aged under 55?

Does the inherited pension count towards the beneficiary's lifetime allowance?

TcpnT

My understanding is:

Yes

No

Would be interested to hear the views of others

Fermion

TcpnT is correct but only if the pensioner in drawdown has completed a beneficiary form and lodged this with the Drawdown provider. There is a good explanation on the HL website:-

https://www.hl.co.uk/pensions/drawdown/what-happens-when-i-die

mightbedave

Thank you TcpnT and Fermion. That does confirm what I thought from reading various articles online but couldn't quite believe it. It seems bizarre that you can get all the money out tax free when the whole premise of tax relief on pension contributions is that it is taxed on the way out. Still, I'm not complaining though!

kidmugsy

mightbedave wrote: »

It seems bizarre that you can get all the money out tax free when the whole premise of tax relief on pension contributions is that it is taxed on the way out.

It's meant to remove a disincentive to contributing to a pension, the "it'll all die with me" argument or the "it'll all vanish in death duties" argument. Mind you, it does look expensive so no doubt it will be scrapped quite soon. And, oddly, the freedom from income tax vanishes if the pension contributor dies at 75 or older.

I dare say it'll soon be that you get 25% tax-free and pay income tax on the rest. That will be hard on, say, a widow who might end up paying 40% tax when her husband would have paid only 20%. Tax reform always throws up hard luck stories.

lisyloo

I dare say it'll soon be that you get 25% tax-free and pay income tax on the rest.

I think it would be quite un-wise to dis-incentivise retirement savings in any way. Doesn't mean it won't happen.

Flugelhorn

my personal pension plot (about 95K in there) will take me over the LTA, was planning to leave it where it was and the kids can have it when I pop my clogs (either tax free or at their rate) ... but if I have gone over the LTA will it get 55% or whatever at that stage?

pip895

Flugelhorn wrote: »

my personal pension plot (about 95K in there) will take me over the LTA, was planning to leave it where it was and the kids can have it when I pop my clogs (either tax free or at their rate) ... but if I have gone over the LTA will it get 55% or whatever at that stage?

The LTA isn't that low! its currently 1.03 million - or are you one of those lucky people with a massive DB pension?

Triumph13

lisyloo wrote: »

I think it would be quite un-wise to dis-incentivise retirement savings in any way. Doesn't mean it won't happen.

All that change would do is bring treatment of inherited pension in line with the treatment if the original saver drew it out himself or died after age 75. Seems pretty reasonable to me.

Flugelhorn

pip895 wrote: »

The LTA isn't that low! its currently 1.03 million - or are you one of those lucky people with a massive DB pension?

I know the LTA level - just wondering what happens to this private pension if inherited by my family

mightbedave

Flugelhorn wrote: »

my personal pension plot (about 95K in there) will take me over the LTA, was planning to leave it where it was and the kids can have it when I pop my clogs (either tax free or at their rate) ... but if I have gone over the LTA will it get 55% or whatever at that stage?

As far as i understand your entire pension pot is assessed against the LTA when you start drawing benefits from it and again at age 75. If you die before age 75 it is assessed against the LTA at that point.