Inheritance and crystallisation

Madeinireland101

Hi - just a fairly simple question that I’m hoping someone can answer for me please...
If I have a SIPP and I pass it on as an inheritance, if I died before 75 I understand it would be tax free to the recipient. If I die after 75 I understand it would be taxed at the recipients normal tax rate taking into considerations sums that they withdraw and including that as additional income.
The question is...If I crystallise the SIPP how does that change the picture above other than simply reducing the pension by 25%?
Thanks...
Oh and a second question if I may - if the beneficiaries of my will are two people (daughters) does the pension just get split into two equal parts?
Thanks...

Linton

Crystallising the pension will not make a fundamental difference to the inheritance of a SIPP.  What I dont know for sure is if you die after 75 whether the recipient has their own TFLS or it is all taxable.  Since I cannot find any mention of a TFLS wrt an inherited pension anywhere I guess that there is no TFLS.

Your understanding of the basic tax position is correct.  However one detail: the SIPP is not part of your estate and so is not covered by your will.  Unless the pension trustees deem them inappropriate they will implement your wishes as stated in the nomination form you completed when the SIPP was set up.

wjr4

There is no TFLS for a beneficiary. You state the % that you wish the beneficiaries to receive on a nomination form/expression of wishes form. Your pension is outside of your estate for inheritance tax purposes. 

zagfles

Your will (usually) has no effect on who gets your pension. I think there are some exceptions. Usually as above you need to contact the pension provider for an expression of wish form.

Crystallised and uncrystallised are treated the same. So if you expect to leave pension for your beneficiaries, it can be more tax efficient to draw tax free cash and leave them crystallised funds. 

zagfles

wjr4 said:

There is no TFLS for a beneficiary. You state the % that you wish the beneficiaries to receive on a nomination form/expression of wishes form. Your pension is outside of your estate for inheritance tax purposes. 

Usually - though it's worth pointing out there are rules to prevent abuse such as making large contributions when terminally ill.

mark55man

using HL as an example provider.

if I had £100K in a HL DC SIPP, and (I think irrespective of crystallized or not, and over 75 or not) I nominated my children equal shares. once all the dust had settled and the ashes been scattered, would my children

• each have a HL DC SIPP with their share of the value. 
• or would they have a cheque (figurative or literal) waiting for them to claim and transfer to their own scheme of choice, 
• or could they take it as a payment at their marginal rate of tax
• or something else or all of the above

Thanks

Madeinireland101

Thanks all for your comments 😀

zagfles

mark88man said:

using HL as an example provider.

if I had £100K in a HL DC SIPP, and (I think irrespective of crystallized or not, and over 75 or not) I nominated my children equal shares. once all the dust had settled and the ashes been scattered, would my children

• each have a HL DC SIPP with their share of the value. 
• or would they have a cheque (figurative or literal) waiting for them to claim and transfer to their own scheme of choice, 
• or could they take it as a payment at their marginal rate of tax
• or something else or all of the above

Thanks

See https://www.hl.co.uk/news/articles/archive/what-happens-your-pension-when-you-die

caveman8006

Note one crucial (and bizarre) wrinkle here: if you have not crystalized the Funds when you die before 75, they will be tested against your LTA at death and any excess subject to the penalty tax before it can be passed on as an inheritance. But, if you have already crystalized funds at death before 75, there is no further BCE test and therefore no tax due on any subsequent growth on the funds, even if it has taken them over your LTA. So, a 55 year-old who fully crystalizes a fund at 100% of the LTA of £1,073,100 and leaves £804,825 in drawdown which then grows at a nominal rate of 5%pa with no income being drawn could leave a pot worth £2,134,440 completely tax free if he died on the eve of his 75th birthday. But, the following day would have to pay a penalty LTA tax charge of up to 55% of the £1,330,615 of accumulated returns in excess of his LTA (ie £731,838 if taken as capital)...a very expensive day indeed!

zagfles

caveman8006 said:

Note one crucial (and bizarre) wrinkle here: if you have not crystalized the Funds when you die before 75, they will be tested against your LTA at death and any excess subject to the penalty tax before it can be passed on as an inheritance. But, if you have already crystalized funds at death before 75, there is no further BCE test and therefore no tax due on any subsequent growth on the funds, even if it has taken them over your LTA. So, a 55 year-old who fully crystalizes a fund at 100% of the LTA of £1,073,100 and leaves £804,825 in drawdown which then grows at a nominal rate of 5%pa with no income being drawn could leave a pot worth £2,134,440 completely tax free if he died on the eve of his 75th birthday. But, the following day would have to pay a penalty LTA tax charge of up to 55% of the £1,330,615 of accumulated returns in excess of his LTA (ie £731,838 if taken as capital)...a very expensive day indeed!

Good points, however the highlighted bit is not quite right. They're not tested at death, they're tested if and when the funds are designated within 2 years of the scheme administrator being informed of the death. If they're not designated in that time, then there is no LTA test, however the downside is that the income is then taxable.

But for a beneficiary who doesn't pay tax or only pays basic rate tax, who is happy to wait 2 years and is also happy to take it out slowly enough to not move into higher rate tax, this could be a better option for funds in excess of the LTA.

mark55man

That's interesting, but even assuming cautious growth on £2m the fund would be accelerating beyond your ability to drain it with basic rate tax.  So at that point I'd be thinking I might be glad of having more than the average number of young adults (although equally I am a long way off 7 figures)