What to do with SIPP after husband's death?

Singh23

My husband died and the two year deadline to decide on his SIPP is fast approaching. He invested £30,000 and the value of the SIPP is now £42,000 - currently invested in stocks and shares.

As the beneficiary, I have been advised that I have three options: tax-free lump sum, annuity or keep it invested (drawdown) in my name.

I have been told that if I pick drawdown I would not be able to add to it, as it is not my own pension - which is what I would have thought to do. Fortunately, I am financially secure since his death and I am not desperate for the cash lump sum, or even annuity.

Is there any real benefit to the drawdown option? I understand there may be a possibility to further pass this on to my children without tax in the event of my own death. Would this be the most logical option? Are there any other major considerations?

I would really appreciate some advice please as it is time sensitive. Thank you in advance

Exotoxin1

If you don't need the money leave it invested in your name to be inherited by your children, as it will be outside your Estate and free of Inheritance Tax (and income tax if you died before age 75).

Secret2ndAccount

Leaving it in to avoid inheritance tax could be a mistake. If a husband leaves everything to his wife, then she leaves it to the children, they will have a tax free amount of between 650k and 1 million before they have any inheritance tax to pay. (Depends if a house is included or not). So, probably, you don’t have to worry about IHT.

If you leave the money in the pension, then live beyond age 75, the money switches from tax free to taxable in the event of your death. It would be treated as income and your children would pay income tax on it.

Leaving it in for now has the benefit that it stays invested and hopefully will grow (tax free).

So, if it was me, and my estate wasn’t in IHT territory, I would leave it in for drawdown, take it out in bits as I needed it, and then take out anything left before my 75th birthday.

This would have made a great exam question. Sorry for quoting so many rules at you.

dunstonh

If you pick drawdown, you cannot add to the drawdown side of the plan but it doesn't stop you adding to the accumulation side.

Depending on your provider, they will either have segments within one plan (a segment for each type) or they will have a specific plan for each type.

Sometimes, providers only tell you what they have available and don't let you know what else is available on the marketplace or how others would do it.

Is there any real benefit to the drawdown option?

it depends on your circumstances.    If your husband was under 75 at point of death, then the proceeds, when drawn can be tax free.  It is also outside of the estate for IHT purposes.  It doesn't form part of your lifetime allowance.  It can be passed down again to your beneficiaries.

Singh23

Sorry - this is a SIPP with Hargreaves Lansdown if that helps. My husband died before age 75, so it is tax free. My estate would roughly be worth £750k including house.

I'm a bit lost - now thinking whether to take the lump sum and then simply put it into a SIPP myself (if I wished to do so). Taking the lump sum also seems the simplest option

Secret2ndAccount

To pay money into a SIPP you need to have earned income (not pension) during the year. Otherwise your limit is 3600 per year. Are you still earning?
You can put 20k per year into an investment ISA, but what's the point of pulling it out of the current SIPP only to put it in an ISA? Unless you are about to be 75.
You could take the cash, and give some of it to your kids, or make payments into SIPPs for them, as long as they are earning.
The benefit of leaving the money in the SIPP is the tax free growth.

More on IHT.  Each person has an IHT allowance of 325k. If you leave a house to your children, you get an extra 175k, assuming the house is worth enough. So it looks like your husband's allowance was 1/2 million. If he passed everything to you, then you get that 1/2 million allowance too. So, when your time comes, you will have a total of 1 million threshold before IHT kicks in. 

One point to note: did your husband leave anything to anyone else? If he bequeathed 50k to the kids, or the cats home or the rugby club, that uses up some of his IHT allowance, so you would only then have 450k of his to add to your 500k.

If in doubt, leave it in. You can take it all out any time by filling in a couple of forms. The only critical thing right now is to make a decision inside 2 years.

Albermarle

If in doubt, leave it in. You can take it all out any time by filling in a couple of forms. The only critical thing right now is to make a decision inside 2 years.

OP - just to be clear. If you leave it invested /in drawdown . You can as said above take it all out at a later date, OR take a regular income from it OR take ad hoc payments from it Or just leave it alone

Malthusian

Singh23 said:

Is there any real benefit to the drawdown option?

If you pick the drawdown option you can switch to the lump sum option at any time by simply taking it out tax-free. If you pick the lump sum option you can't just move it into a drawdown pension and get the benefits of tax-free growth and Inheritance Tax exemption, as you are constrained by the annual limits on pension contributions.

The question should therefore be "Is there any real benefit to the lump sum option?"

Secret2ndAccount said:

One point to note: did your husband leave anything to anyone else? If he bequeathed 50k to the kids, or the cats home or the rugby club, that uses up some of his IHT allowance, so you would only then have 450k of his to add to your 500k.

Wouldn't a bequest to the cats' home or the rugby club usually be a charitable bequest and therefore not reduce the nil rate band? (Assuming a local community rugby club rather than a Premiership one.)

HappyHarry

If you chose the drawdown option, then that will give you  more time to decide what you want to do, and take the pressure off the 2-year deadline that you are facing.