Treatment of SIPP in estate, and IHT or other tax

dunroving

I've been going around in circles for a while to figure this out - and am not sure if this query belongs in this forum or the pensions forum. Anyway, here goes.

Current age 65, my total assets will exceed IHT threshold if I die any time soon. I have two SIPPS. I have taken the 25% TFLS from one, but not the other.

I keep reading that pensions are exempt from IHT, but in every case, the scenarios that are presented involve leaving the pension to a specific person (either in the will, or in the beneficiary statement held by the pension provider). That person then becomes the "holder" of the SIPP, IHT-free (and I presume would subsequently pay income tax if applicable, when withdrawing from the SIPP).

What happens in the case where your pension is left to several people? My will is pretty basic - specific small (£1k) cash gifts to a short list of people, and the residuary estate (primarily house, cash, ISAs, SIPPs) left to another short list of people, in specific proportions. I haven't listed specific beneficiaries with the pension provider.

Would the two SIPPS essentially be liquidated, free of IHT, and distributed to the residuary beneficiaries? Or is it more complicated than that?

Linton

Your cannot leave your SIPP to someone through your will as it is not part of your estate, essentially it is not owned by you.

The destination of the SIPP on your death is determined by the pension scheme Trustees who will normally pass it on to someone nominated  by you in an "Expression of Wish" which you would have completed when you set up the pension.  You can change this at any time.  However the Trustees have the right not to follow your wishes if the wishes can be seen as perverse.  It is rare that this happens.

Whether an expression of wish can nominate multiple people I dont know. All the examples I have read about show it as one person with a possible alternative should that person die before you.  Perhaps you can ask your SIPP provider.

If you die before age 75 the SIPP is inherited without any tax liability - it can be encashed or an income taken from it tax free. After that date it is inherited as a normal pension with the same tax status as any other SIPP.

SeniorSam

As already stated the best advise is to speak with your SIPP  platform, who can explain how the tax free sum can be passed on.

The main disadvantage of taking the tax free 25% from the SIPP is the restriction you place on not allowing this tax free sum to accumulate. The longer it stays in the SIPP, the greater the rewards will be and at age 65, there could be another 20 years to go, when the accumulated sum could be far greater and believe me, that could be good growth in the right investments.

Do come back and let the forum know what you find out, as it may help others looking for information.

dunroving

Thanks, both. If I had a spouse or children (I have neither), the idea of nominating an individual to be the recipient of my SIPP would make sense. But as with the remainder of my estate, my wish is to divide all of my assets (including the two SIPPS) among a small group of people.

Must admit, it seems a bit strange that Fidelity and Vanguard could decide who gets my SIPPs when I die ... I don't think at present I have even designated anybody in an expression of wish form.

Re: the 25% TFLS, I withdrew the one from Fidelity a couple of years back because the cash was critical for post-retirement plans. I have no intention to withdraw the 25% TFLS from the Vanguard SIPP. 

Will report back when I have a response from Fidelity and Vanguard.

noh

You usually can nominate any number of benificiarys.
Here is a link to the Fidelity FAQs on the subject
Fidelity FAQ

Marcon

dunroving said:

Thanks, both. If I had a spouse or children (I have neither), the idea of nominating an individual to be the recipient of my SIPP would make sense. But as with the remainder of my estate, my wish is to divide all of my assets (including the two SIPPS) among a small group of people.

Must admit, it seems a bit strange that Fidelity and Vanguard could decide who gets my SIPPs when I die ... I don't think at present I have even designated anybody in an expression of wish form.

There's a good reason - by making the recipient(s) of the payment discretionary, it is that discretion that enables the SIPP to avoid being subject to IHT.

Linton said:

Your cannot leave your SIPP to someone through your will as it is not part of your estate, essentially it is not owned by you.

Whether an expression of wish can nominate multiple people I dont know. 

You can certainly nominate more than one person in an Expression of Wish form - and make sure you have a 'back up' so that if a nominee dies before/at the same time as you (sorry!), there are alternative(s) for the pension provider to choose from. Many EOW forms have space for a number of nominees and a column asking you to specify the %age you wish to leave to each. 

It is far too common for people to trot out the line that 'pensions are outside the estate so aren't subject to IHT', which is both incomplete and misleading. There is nothing to stop you saying that you would like your SIPP to be paid to your estate. It would still be outside the scope of IHT provided that the payment is discretionary. Not all SIPP providers understand that nicety - you may have to enlighten them! Some commentators advise against specifying in your will that you would like % of your SIPP paid to xxxx, in case HMRC lights on that as some sort of 'proof' of a binding nomination....and a binding nomination would bring your SIPP within the scope of IHT.

p00hsticks

Linton said:

Whether an expression of wish can nominate multiple people I dont know.

The specific pension provider may impose limits, I guess, but in theory you can have as many as you wish - the estate I've been dealing with named about forty  - friends family and charities, similar to the list in the will.

Marcon

p00hsticks said:

Linton said:

Whether an expression of wish can nominate multiple people I dont know.

The specific pension provider may impose limits, I guess, but in theory you can have as many as you wish - the estate I've been dealing with named about forty  - friends family and charities, similar to the list in the will.

Worth checking if your pension provider imposes any restrictions on the category of beneficiary - I've certainly seen that sort of restriction in place.

SeniorSam

dunrovin ....... that;s an excellent answer from noh, with information on this from Fidelity. As you would like to nominate several groups, it may be best if you also add your own letter of wishes for Fidelity and your executors , so that the Trustees can see your reasoning for your selection of beneficiaries.

Do bear in mind, that although the Pension Trustees will decide who inherits your pension, this is simply to comply with Trust Law. However, when the SIPP owner has nominated the beneficiary /s, then there would need to be a very good and legal reason why anyone else would receive it.

Make sure that you leave your reasons with your executors and explain what you have done regarding your pension funds, so that they will be able to ensure that your wishes are carried out.

dunroving

Thanks, all, some very helpful responses so far. I've messaged both companies and will add their replies here. There's a possible additional complication that one of the beneficiaries is a US citizen, US resident, and I've asked about that, also.

FYI, I have since discovered that the beneficiaries form for both Fidelity and Vanguard has the opportunity to list multiple beneficiaries, with proportions, so I may just complete that, to reflect what my will currently states. 

dunroving

First reply (from Fidelity):

"Thank you for your secure message of 23 November 2022, regarding your beneficiary query.

Please know, if you do not not allocate beneficiaries on your accounts, then it will be the responsibility of the executors on the probate to decide who is the benefit from the ISA. For your SIPP account, it's our board of trustees who decide on who will benefit from it. When a client passed away, holdings will remain in the market until probate has been sent in with the sell or transfer instructions.

With regard to US citizenship, please know, if the individual wishes to make a withdrawal having inherited the account, they can only do so to a UK bank account with an ISA. For the SIPP account however, the US bank is acceptable.

It is important to note, that the SIPP falls outside of your estate, and it will be up to our trustees to identify who is to benefit from said account.

For further information on the process, please see our helpful webpage. I have included a link below which you can copy and paste to your internet browser for access:

https://www.fidelity.co.uk/what-to-do-when-someone-dies/"

So, my understanding from this message is as follows ...

ISA: in one sense this seems quite straightforward (because the executors decide who gets the money - and would presumably just follow the instructions regarding beneficiaries in my will - but see note below regarding the US beneficiary), .

SIPP: Probably a good idea to complete a beneficiary form, using the same proportions as I have designated in the will. That at least avoids any unnecessary additional work on the part of the executors.

US beneficiary: Not sure I understand the comment in the ISA, regarding the US beneficiary having to receive it in a UK account. A US resident cannot generally open a UK bank account. Perhaps their comment assumes the beneficiary wishes to keep the ISA status? (they won't want to, in fact are not allowed to). I had assumed the ISA contents would simply be cashed and added to the assets in the estate(?) Re: the SIPP, I'm quite surprised they would be happy sending to a US bank, as a UK pension does not qualify as a pension in the US. Argh, so I'm still pretty confused about this.