How to manage my parents' SIPPs going forward?

Notepad_Phil

itwasntme001 said:

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.

That is true in that you access the remaining 75% via those means, but provided your SIPP allows it then you don't actually have to drawdown any of the money from the now crystallised part, you can just leave it there continuing to hopefully grow. And if you SIPP provider does not allow it then you can firstly move the pensions across to one of the many that do.

Though as dunstonh says above, taking 25% as a lump sum might not be the most tax efficient way as it does potentially create a IHT liability.

itwasntme001

Thanks Notepad Phil.  Can't the 25% lump sum be treated as income that is not needed to be spent and thus can be gifted away completely IHT free with no 7-year rule to follow etc?  Since the lump sum is classed as income I believe?  I may be wrong but I think Malthusian was hinting at this earlier in this thread?

XRAT

I believe you are thinking of "regular" gifts out of income, as opposed to a one off?

itwasntme001

I am not sure if the gifts need to be regular and similar size for the IHT exemption to be valid?  If they do then a 25% TFLS would be a one off payment and therefore not valid for IHT exemption?

dunstonh

Can't the 25% lump sum be treated as income that is not needed to be spent and thus can be gifted away completely IHT free with no 7-year rule to follow etc?

Directly? - no. indirectly? possibly.

The 25% element is not income.  Only the 75% element is.    However, the source is not important.    If the income can support it, whether it comes out of the 25% or a savings account, it doesn't matter.

This still comes back to why would you want to increase the estate only to give it away.  Why can't the existing assets within the estate be gifted first?

itwasntme001

dunstonh - thanks for the reply.  On your question on rationale - it was due to the potential that the SIPPs would be inherited after my parents' 75th birthday and thus there would potentially be income taxes to pay for me and my sibling once we start drawing on the SIPPs.

Is it possible, once inherited, to leave the SIPPs untouched i.e. we are not forced to take income from them?  That way it gives flexibility to manage the income tax liability.

Thanks for confirming about my previous question on the 25% TFLS - so my understanding from your reply is that what I had proposed is pointless?

dunstonh

Is it possible, once inherited, to leave the SIPPs untouched i.e. we are not forced to take income from them?

You are only taxed when you take the income, whenever that is.  You do not need to take it until you are ready.

Thanks for confirming about my previous question on the 25% TFLS - so my understanding from your reply is that what I had proposed is pointless?

With limited information, it is hard to say.  However, it usually makes sense to reduce the assets in the estate before introducing new assets to the estate (from the pension).

LHW99

Possibly if there are grandchildren, and it is appropriate at the time, there could be a deed of variation to pass the SIPPs directly to the grandchildren. If, for example, their tax band is lower than your generation's.

An IFA would know the ins & outs of these kind of questions, and suggest what has to be considered.

Malthusian

itwasntme001 said:

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)?

Or your parents could skip that stage and nominate your children to receive the pension fund. (This has the potential to get tricky if there may be more grandchildren in the future - unlike Wills, pension expressions of wish usually require specific named people. A nomination to "my grandchildren" has a high chance of being disregarded by the trustees whereas putting "my grandchildren" in a Will is fine.)

Remember that assets can be freely passed between the generations (albeit with the 7 year rule applying) whereas pension funds are shackled to the member until death do them part.

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.

"Trusts" is usually just another form of gift, although there are complicated variations.

You haven't mentioned investments that qualify for Business Property Relief. Unlike mainstream stockmarket investments, these are very high risk with a real chance of permanently losing money (if one of you survives the 2-year clock, you have to lose more than 40% to be worse off, but it's very possible). Independent professional advice would be essential.

Bear in mind that your parents' estate will increase due to inflation and investment growth while the nil rate band only increases in fits and starts. (And we had an increase to the NRB recently so it's very possible there won't be another for a while.) If an estate with a mere £400 inheritance tax bill, too low to bother doing anything about, experiences growth at 5%pa for 10 years, that £400 IHT bill will grow into a £250,000 IHT bill. Unless you're in the habit of paying £25,000 in voluntary tax to the Government each year, doing nothing about it makes no sense.

Malthusian

LHW99 said:

Possibly if there are grandchildren, and it is appropriate at the time, there could be a deed of variation to pass the SIPPs directly to the grandchildren. If, for example, their tax band is lower than your generation's.

A deed of variation would have absolutely no effect on a SIPP. Deeds of variation change the distribution of an estate, pensions are outside the estate.