How to manage my parents' SIPPs going forward?

itwasntme001

Hello,

Both my parents have a SIPP each and no other pension (excluding my Dad's annuity).  Dad's is worth roughly £200k and Mum's around £50k.  Both are 65, retired and will start receiving full state pensions next year.  Both do not need to draw from the SIPPs to fund their outgoings as they have enough savings, rental income, annuity income and eventually state pensions.  Dad is a basic rate taxpayer and already utilizes marriage allowance from my Mum's unused personal allowance.

The question is what should we do about the SIPPs?  I am looking for other people's thoughts on what we should do given my parents do not need the money from the SIPPs and since inheritance tax is a concern, the SIPP provides a way to shelter at least some of the assets away from this tax.

They both contribute the £2.88k a year to get the £720 government topup.  The following options are being considered:

- Withdraw the 25% tax free lump sum for both and pass the money onto me and my sibling now so the "7-year" rule kicks in (parents are both healthy).  This is to avoid me and my sibling potentially paying higher income taxes when we eventually draw on the SIPPs (although potentially income taxes would still have to be paid on the remaining 75%).  I am confused with this though - is it possible to withdraw the 25% tax-free and keep the rest in the SIPP invested until it gets passed onto me and my sibling?

- Keep as it is, continue paying the 2.88k into the SIPPs, sheltering more from IHT and me and my sibling take the risk of withdrawing the full SIPP money at our marginal tax rates assuming parents live beyond 75.

Any opinions on what we should do given we are trying to manage the IHT as well as income taxes (for both parents and me/sibling)?

Daniel54

Your parents are eligible for the additional main residence nil rate band and therefore have a combined nil rate IHT allowance of £1m ?
They have assets excluding the SIPPs which exceed this amount ?
If so, prudent estate planning would suggest reducing those assets ( and possibly gifting them) to the extent that potential IHT is mitigated as far as possible
Without this ,playing around with the SIPPs ,which sit outside IHT, doesn't seem to make much sense at this point in time.
Have they both obtained a state pension forecast ?.They may not each be eligible for the full new state pension amount
Before they individually reach 75 it is possible for them to take the 25% tax free without drawing from the rest of a SIPP
If their estate is as large as you suggest then they should seek independent professional advice on IHT mitigation routes available to them.

LHW99

Also, if the SIPPs are passed on due to death before age 75,  the beneficiaries would not pay tax on withdrawals (I think).

If death is after 75, then withdrawals by beneficiaries would be subject to their rate of tax.

So these could be left invested until 6 months before they reach that birthday before taking the 25%

itwasntme001

Thanks for both your replies.  LHW99 - thats a good suggestion, just to take the 25% at 75 year old and leave the rest as is.  I read that once you take the 25% and crystallise the pensions, you have to take the remaining 75% as an annuity and/or drawdown.

Daniel - to answer your questions despite gifting already some of their money, they still are above the £1m threshold excluding the SIPPs.  Both have received a forecast for state pension and they are indeed the full amount.

Worth pointing out that the funds in the SIPPs are fully invested in equities and what we have been doing when contributing the £2.88k is to sell the equivalent amount from their ISAs and usually pass this cash on as gifts to me and my sibling.

Just wondering if we are missing a trick or a strategy we should consider given our (fortunate) circumstances.

Malthusian

If they are looking to reduce their Inheritance Tax liability and the two simplest and most tax-efficient options have already been discounted (which are 1) spend the money 2) give it away), they should see an FCA-regulated independent financial adviser. All the options which are not 1) and 2) are complex and require professional advice.

Mum could start drawing income up to her remaining personal allowance (assuming it hasn't all been transferred to Dad) and gifting it to her heirs, which would be immediately exempt from IHT as gifts out of regular income (no 7 year rule). That is however tinkering at the edges if there is a serious IHT liability which something can be done about.

Do they have Lasting Powers of Attorney in place?

Malthusian

LHW99 said:

Also, if the SIPPs are passed on due to death before age 75,  the beneficiaries would not pay tax on withdrawals (I think).

If death is after 75, then withdrawals by beneficiaries would be subject to their rate of tax.

So these could be left invested until 6 months before they reach that birthday before taking the 25%

Bear in mind that even after age 75, if the beneficiaries pay 20% tax on withdrawals, that is better than 40% Inheritance Tax. It only makes sense to draw the tax free cash if it is going to be spent, gifted or otherwise removed from IHT.

I'm assuming the Lifetime Allowance isn't a factor.

Brynsam

With over £1m of assets, perhaps getting some proper professional advice would be a good call. Nobody here has enough background about your family's overall financial position to do anything other than speculate based on a tiny amount of information.

dunstonh

- Withdraw the 25% tax free lump sum for both and pass the money onto me and my sibling now so the "7-year" rule kicks in (parents are both healthy).

Pensions are outside of the estate.  So, by doing this you are actually creating a potential IHT liability.  Better to gift other assets as a means to reduce the estate (or use other methods)

itwasntme001

Malthusian said:

If they are looking to reduce their Inheritance Tax liability and the two simplest and most tax-efficient options have already been discounted (which are 1) spend the money 2) give it away), they should see an FCA-regulated independent financial adviser. All the options which are not 1) and 2) are complex and require professional advice.

Mum could start drawing income up to her remaining personal allowance (assuming it hasn't all been transferred to Dad) and gifting it to her heirs, which would be immediately exempt from IHT as gifts out of regular income (no 7 year rule). That is however tinkering at the edges if there is a serious IHT liability which something can be done about.

Do they have Lasting Powers of Attorney in place?

Thanks for your reply Malthusian, much appreciated.  On your last question, not yet but we have started the process for LPA (financial and health) applications only that the pandemic is keeping us from getting the relevant witnesses to sign etc.

We have obviously gone through the 2 options you mention as much as possible; my parents do not seem to like spending money no matter how much you force them and the plan was to use some of the savings for many holidays to bridge the gap to state pension but low and behold this pandemic happened and so spending is well below what we had otherwise expected.

We had always thought an IFA can not add any value to our situation as we have done a lot of reading around the subject of avoiding IHT methods.  The one area we are not so sure about are trusts but then I have read that they do not really help that much as it just transforms IHT to another type of tax you have to pay (this may not be accurate but I have read overall the tax mitigation is not that effective when using trusts).  The total assets are certainly not into the many millions and my Dad will eventually receive his inheritance which can be passed directly onto me and my sibling without even entering my Dad's estate.  Hence we are not so sure IFA would add any further value or that trusts would be of any value either.

itwasntme001

Malthusian said:

LHW99 said:

Also, if the SIPPs are passed on due to death before age 75,  the beneficiaries would not pay tax on withdrawals (I think).

If death is after 75, then withdrawals by beneficiaries would be subject to their rate of tax.

So these could be left invested until 6 months before they reach that birthday before taking the 25%

Bear in mind that even after age 75, if the beneficiaries pay 20% tax on withdrawals, that is better than 40% Inheritance Tax. It only makes sense to draw the tax free cash if it is going to be spent, gifted or otherwise removed from IHT.

I'm assuming the Lifetime Allowance isn't a factor.

Good point although it is likely my sibling will be a higher rate tax payer and potentially me too, even in retirement.  I guess we could always not draw on the inherited SIPPs and pass it onto our heirs (so passed down a second time)?

itwasntme001

dunstonh said:

- Withdraw the 25% tax free lump sum for both and pass the money onto me and my sibling now so the "7-year" rule kicks in (parents are both healthy).

Pensions are outside of the estate.  So, by doing this you are actually creating a potential IHT liability.  Better to gift other assets as a means to reduce the estate (or use other methods)

Thanks dunstonh.  Yes agree, which is why we are thinking whether to utilise the 25% tax free option now whilst my parents are 65 and healthy and let the 7 year clock start now as well.  But then me and my sibling do not exactly need the money, there is some risk that my parent's pass away within the 7 years and we have no idea what mine and my siblings income tax situation would be if/when we draw the SIPPs and I think we can always pass onto our own heirs?

Perhaps best to leave the SIPPs as is and get gifted from their other savings and also unused income?