What are the current taxation rules regarding SIPP at death?

Albermarle

NedS said:

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)

Could be though once they start down this path, then they might get in the swing of it, and the next thing already being floated is the 'issue' of the fact that  pension pots are not included in IHT calculations.
Somewhat more contentious and complicated item though. 

Albermarle

NannaH said:

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.  

AIUI , yes that is the case. I think it is due to some historical anomaly, but not really sure. You can see why it could easily be for the chop at some point.

Pat38493

Albermarle said:

NannaH said:

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.  

AIUI , yes that is the case. I think it is due to some historical anomaly, but not really sure. You can see why it could easily be for the chop at some point.

It seems to be that it's treated like the shared money between the couple just like the money in the bank account.

NedS

Albermarle said:

NedS said:

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)

Could be though once they start down this path, then they might get in the swing of it, and the next thing already being floated is the 'issue' of the fact that  pension pots are not included in IHT calculations.
Somewhat more contentious and complicated item though. 

I wonder how much tax this would actually raise though? If we accept that you'd probably need to reach 55 to have accumulated a significant pot, and that at age 55, there is a 24% chance of dying in the next 20 years (i.e, before age 75), so is only likely to apply to 24% of 55YO, and there is a statistically higher chance that those who are wealthy will live longer, so those dying before 75 are statistically likely to be less wealthy (and thus have smaller DC pension pots), the benefit to HMRC may be small. Plus many of those with significant pension wealth are likely to have DB pots further reducing the amount in DC pots.

Then there is the disadvantage to consider for a couple where they would have two tax allowances to draw upon as a couple, but if one were to die, although the surviving spouse may inherit the DC pot, having to draw that as taxed income but without the tax allowance of their former spouse available to them, they would be placed under an additional tax burden. Rather than making a beneficiary pension tax free - perhaps it should inherit nominal tax allowances - first £12,570/year is tax free, etc. That could be a mid-way solution between tax free and taxable and could apply to all inherited pensions regardless of age of death (and even spousal DB benefits too) making tax treatment uniform across the board.

soulsaver

I'm guessing it's funded from some sort of back scratching arrangement between HMRC & the insurance industry, not directly from the tax payer.