What are the current taxation rules regarding SIPP at death?

soulsaver

Situation person aged 70s has taken the 25% TFLS,  has low 6 figure sum remaining. I believe outside estate for IHT?

Does anything alter by age at death?

Expression of wishes benefits spouse. Is there a tax liability for spouse? 

Any pointers/links to rules would be much appreciated.

billy2shots

If a client dies before the age of 75, there is no tax to pay on the payment of death benefits from the SIPP, whether this is taken as income or the whole fund is withdrawn as a lump sum. If your client dies after the age of 75, any death benefits paid from the SIPP are taxed at the recipient's marginal tax rate.




Government link.

In short 75 is the key age. 

https://www.gov.uk/tax-on-pension-death-benefits

penners324

Billy's answer, Which only relates to death benefits, very unlikely a SIPP will have any.

I believe usually the SIPP will just transfer into spouses name. Then usual income tax payable on drawdown receipts

NedS

What type of pension is it? A SIPP or DC pot presumably?

You are correct that the pension falls outside of the estate and therefore is not liable to IHT.

How old was the deceased at the time of their death?

If 75 or over, the beneficiary will pay tax at their marginal rate on any withdraws, otherwise withdraws can be tax free. I think there are some relevant regulations about transferring within 2 years of death.

The pension provider should also be able to provide general information on the tax position. For example, see:

https://www.hl.co.uk/help/sipp,-drawdown-and-annuity/sipp/retiring/what-happens-to-my-SIPP-when-i-die

soulsaver

SIPP see thread title Don't worry I do it, too...

Hoping for the best, planning for the worst - subject is alive, but not in good health. 

Does the TFLS alter anything - say, not taken before death? I know if taken it'll be part of the estate. So, if not needed by the subject, best leave in the SIPP?

So spend your estate cash first, 1 cash in pocket/under the mattress 2 cash at bank, 3 ISAs then 4 SIPP?

NedS

soulsaver said:

SIPP see thread title Don't worry I do it, too...

Hoping for the best, planning for the worst - subject is alive, but not in good health. 

Does the TFLS alter anything - say, not taken before death? I know if taken it'll be part of the estate. So, if not needed by the subject, best leave in the SIPP?

So spend your estate cash first, 1 cash at bank, 2 ISAs then 3 SIPP?

No, I don't think it makes any difference to the tax treatment after death if funds are crystallised or not - they are still in the pension wrapper so therefore fall outside the estate for IHT, and I assume tax treatment for the beneficiary is the same as quoted above. Obviously, as you say, any funds already withdrawn from the pension wrapper now fall within the estate.

Hopefully others can confirm that.

dunstonh

Expression of wishes benefits spouse. Is there a tax liability for spouse? 

Depends on how the spouse takes the pension.      e.g. doesnt draw it,  takes an income or takes lump sums.

Does the existing provider support beneficiary drawdown?  Not all do (especially older plans). Some will only pay out the value as a lump sum on death.  Some very old ones dont even have return of fund value but other methods (which are not very good).

Billy's answer, Which only relates to death benefits, very unlikely a SIPP will have any.

Death benefit includes what happens to the investment value and billy is correct.

I believe usually the SIPP will just transfer into spouses name. Then usual income tax payable on drawdown receipts

Not quite.  
a) under 75 will be tax free.  75 or over then it is taxable (age of the pensionholder at the time they died)
b) The spouse will have to set up a pension plan to receive the benefits from the deceased spouse and be able to accept beneficiary drawdown.  Not all do.  Benefits marked as beneficiary drawdown cannot be mixed in with crystallised or uncrystalled funds.

soulsaver

Thanks @DunstunH et al
It's in Interactive. I'll need to check what they provide. 

Albermarle

Maybe worth being aware that the fact that a beneficiary pension not having to pay income tax, if the donor dies before 75, is being mentioned as something that may be changed in a future budget.
There is not much logic to it, and could be one of the few pension regulations that could be changed relatively easily.

NannaH

So if a Spouse inherits a £1million pension from someone under 75,  they could draw down £50k ( or more) a year tax free? 😮 Plus another potential £16k UFPLS from their own pension?  

That’s astounding.  

NedS

Albermarle said:

Maybe worth being aware that the fact that a beneficiary pension not having to pay income tax, if the donor dies before 75, is being mentioned as something that may be changed in a future budget.
There is not much logic to it, and could be one of the few pension regulations that could be changed relatively easily.

and no doubt without most people even noticing as it wouldn't directly affect anyone immediately (assuming any change is not applied retrospectively to those already drawing a tax free beneficiary pension)