How much tax on inherited Sipps.

Noonegetsoutaliveanyway

Hello,

I've recently been informed that I am inheriting a % of my grandparents sipps pension fund (My late grandmother was over 75 when she passed away). I have been given 3 options:
1. Take a lump sum
2. Purchase a drawdown plan
3. Purchase an annuity
Ideally we'd like to withdraw the funds but we're unsure of the tax implications of this. My aunt seems sure that we'd heve to pay 55% tax if we take a lump sum but I've read that it would be subject to income tax rates. Can anyone advise me on this?

Many thanks in advance.

xylophone

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

SonOf

Ideally we'd like to withdraw the funds but we're unsure of the tax implications of this. My aunt seems sure that we'd heve to pay 55% tax if we take a lump sum but I've read that it would be subject to income tax rates. Can anyone advise me on this?

Whatever you draw will be added to your income for income tax purposes.

If you left it in the pension, it would remain tax free until you draw it.

Noonegetsoutaliveanyway

Ok thank you very much.
So I'm right in thinking it's standard income rates and not 55%.

Albermarle

2. Purchase a drawdown plan
3. Purchase an annuity

Although you do purchase an annuity by paying a lump sum to buy a guaranteed income , you do not purchase a drawdown plan . You enter into drawdown but there is no permanent commitment like with an annuity.

So I'm right in thinking it's standard income rates and not 55%.

Yes, but of course if it is a significant amount and you take it all as a lump sum in one tax year then it might push you into a higher tax bracket.

ruthlessness

Does anyone know If you have already used up your lifetime allowance do inherited pensions count when you have the second test at age 75? 

zagfles

ruthlessness said:

Does anyone know If you have already used up your lifetime allowance do inherited pensions count when you have the second test at age 75? 

No, it's the LTA of the deceased that matters for inherited pensions, not the benificary/dependant

jamesd

Noonegetsoutaliveanyway said:

2. Purchase a drawdown plan

Drawdown plans typically cost nothing or little to open and withdraw from at places like Hargreaves Lansdown so if they make the "purchase" a  non-trivial cost there's something wrong.

Drawdown lets you take as much out as you like whenever you like so it's ideal for optimising income tax to stay within your personal allowance or basic rate band.

The amount  you take out is just added to your ordinary taxable income in the years in which you take it.

Your aunt is just a few years behind some rule changes.

ruthlessness

zagfles said:

ruthlessness said:

Does anyone know If you have already used up your lifetime allowance do inherited pensions count when you have the second test at age 75? 

No, it's the LTA of the deceased that matters for inherited pensions, not the benificary/dependant

I agree that the LTA of the beneficiary does not matter when it is inherited - but what about the scenario if the beneficiary does not draw it down/  Why wouldn't it be counted at age 75? 

ruthlessness

ruthlessness said:

zagfles said:

ruthlessness said:

Does anyone know If you have already used up your lifetime allowance do inherited pensions count when you have the second test at age 75? 

No, it's the LTA of the deceased that matters for inherited pensions, not the benificary/dependant

I agree that the LTA of the beneficiary does not matter when it is inherited - but what about the scenario if the beneficiary does not draw it down/  Why wouldn't it be counted at age 75? 

I have been looking at this again and I can see that an inherited pension is  treated differently to a drawsown in a number of ways so this could also be one of them.