Some Thoughts on Inherited SIPPs

BobWelham

As far as I understand, an inherited SIPP (ISIPP) differs from a regular self-started SIPP in a few ways.

(1)  The beneficiary (inheritor) cannot make contributions into an ISIPP.

(2)  There is no 25% tax free lump sum drawdown option from an ISIPP. If the deceased died before age 75 then the whole ISIPP may be withdrawn tax-free, otherwise any withdrawal is taxable at the beneficiary’s marginal rate of income tax.

(3)   The beneficiary may make withdrawals from an ISIPP as soon as he/she owns it. There is no compulsory delay until age 55.

(4)  An ISIPP does not count towards the beneficiary’s Lifetime (pension) Allowance (LTA), which is CPI linked and £1,055,000 for 2019-20.

There are some intriguing possibilities for multi-generational ISIPPs. First, all else equal, it is optimal for there to be just one beneficiary per (I)SIPP. If more than one, then the (I)SIPP is split into one ISIPP per beneficiary and each of these will incur its own platform charges.

Suppose old George dies at age 85 and leaves his £500,000 SIPP, free of IHT, to his recently born great-granddaughter, Jane, with (say) Jane’s parents acting as trustees until she is 18.

Utilizing Jane’s PA, £12,500 p.a. can be withdrawn from the ISIPP tax-free. This is 2.5% of the capital value of the ISIPP, and such a yield is very likely to be both sustainable and CPI-indexed indefinitely, for example by investing in well-established and well-managed global growth and income investment trusts.

Of the £12,500, £2,880 can be paid into a Junior SIPP for Jane, and the taxpayer will add £720, grossing it up to £3,600. For 2019-20 £4,368 p.a. (increasing with CPI) can be paid into a Junior ISA for Jane, and the remaining £5,252 into a Junior Dealing Account (DA). (I am using AJBell terminology here and assuming Stocks & Shares accounts.)

When Jane is 18, assuming 5% p.a. growth, the approximate expected values of her accounts are SIPP £108,000, JISA £135,000 and DA £150,000. Her JISA now becomes an adult ISA. Henceforth she can put £4,000 p.a. of her £12,500 p.a. into a LISA, and the taxpayer will top it up to £5,000 p.a. She continues to fund her own (now adult) SIPP with £2,880 p.a. and puts the remaining £5,620 p.a. of the £12,500 p.a. into her ISA.

Her now unfunded DA is large enough to reliably generate £2,000 p.a. tax-free dividend income and in addition realise a few £,000 p.a. of tax-free capital gains. Over time, the DA assets can be fully transferred into her ISA, up to the annual limit (£20,000 p.a. for 2019-20).

Jane will likely undertake tertiary education and possibly post-graduate training (PhD, medic, etc.) and she can continue with these arrangements for several more years until she starts earning a salary. Assuming that income taken from her ISA and ISIPP does not affect her Student Loan (SL) repayment income threshold(?), Jane could then use her ISIPP/ISA income for living expenses and thus facilitate substantial salary sacrifice both to delay her SL repayment and to boost her own SIPP.

All this might be done without diminishing the capital assets in old George’s ISIPP, and in her turn Jane could leave it to a young child, free of IHT. Within a tight-knit, loyal, extended family, on might imagine several such ISIPPs being faithfully and indefinitely passed down the generations in this manner.

Unto those that hath, more shall be given.

crv1963

Ah but the best laid plans, what if Jane decides to marry and blow the lot on a round the world trip with her husband?

Albermarle

it is optimal for there to be just one beneficiary per (I)SIPP. If more than one, then the (I)SIPP is split into one ISIPP per beneficiary and each of these will incur its own platform charges.

In the greater scheme of what you describe, I do not think platform charges would be a deciding factor on how to proceed.

Andrew31

Thanks for sharing!

BobWelham

crv1963 said:

Ah but the best laid plans, what if Jane decides to marry and blow the lot on a round the world trip with her husband?

The head of the family could reason with her - make her an offer she couldn't refuse.