Passing down Pension pot - Tax planning / inheritance planning

Wellgood

Hi all

Was hoping you could help with understanding a few things and advising on how you would approach a similar situation

Situation: Dad passed away under age 75. SIPP Pension pot passed tax free to Mum. 

Mum is aged 72. Total assets  = House (around 800k) and SIPP pension pot (around 500k). Mum has state pension and teacher pension and doesn’t really draw much on the SIPP - maybe 5k p.a . So in all likelihood will be Pension money  and house money passed down to children (3 kids) Caveat- obviously could be used on care home fees at some stage but let’s for now say that is not needed). I am also assuming my mum lives well past age 75 and most likely into her 90’s based on how long my grandparents lived for.

1. Practical point - On my mums passing  How does SIPP pension pot get passed down to the 3 children? Do they just split it into 3 pension pots in the 3 names of the 3 kids? I guess it stays in the SIPP and doesn’t just get paid into our bank accounts?

2. Tax point - my understanding is if pension pot is passed down to kids ( after mum is 75) then it is taxed at our marginal rate. So if we are 40 % tax payers then we will pay 40% tax on any money drawn down? Also my understanding is there is no 25% tax free part anymore but please correct me if I am wrong. 

3. If point 2 is correct then having it in SIPP means children would pay same tax rate 40% as if was outside SIPP e. g. ISA and we paid inheritance tax on it i.e 40%? 

4. In which case - should we be thinking about inheritance tax planning? Again my understanding is my Mum has 1million IHT allowance after which she pays 40%. In current situation then there would not be any inheritance tax as house is under 1million and SIPP does not form part of IHT estate. But as mentioned above - Kids would end up paying 40% tax on money taken from SIPP once it has been passed down to them. As this is obviously a large tax hit can anyone recommend potential strategies to be more tax efficient? E.g Move out of SIPP now? Gifts to children now?, etc

Thanks in advance.
Wellgood

Note : my retirement planning does not involve receiving any money from my mum and would likely be ok if got zero. Reality is will probably get some so am just thinking through best approach to receiving it the most tax efficiently 

NannaH

Even if she was an outlier and needed 10 years of care,  it might be better to buy an immediate needs annuity with money from the sipp - completely tax free as it goes to the care home. 

The house proceeds are then IHT free. 

Or, 

She could withdraw enough to stay under the higher rate tax limit and be taxed at 20% before gifting the proceeds but that risks being pulled back into her estate on death if she dies within 7 years.  So that could mean potential tax of 60% altogether. 

The £3k a year gift allowance isn’t going to go far between 3 grandkids. 

If the Sipp is left until their retirement,  they may not have to pay 40% tax anyway , if any of them are Female, they could also draw some to cover prolonged maternity leave etc.  only paying 20% tax.

If it was me,  I would go for option one.  A £million inheritance, tax free.    Safe in the knowledge any care needs would also be tax free.  5 year care annuities would preserve some of the Sipp, given that 2 years is the average need for care. 

Marcon

Wellgood said:

Hi all

Was hoping you could help with understanding a few things and advising on how you would approach a similar situation

Situation: Dad passed away under age 75. SIPP Pension pot passed tax free to Mum. 

Mum is aged 72. Total assets  = House (around 800k) and SIPP pension pot (around 500k). Mum has state pension and teacher pension and doesn’t really draw much on the SIPP - maybe 5k p.a . So in all likelihood will be Pension money  and house money passed down to children (3 kids) Caveat- obviously could be used on care home fees at some stage but let’s for now say that is not needed). I am also assuming my mum lives well past age 75 and most likely into her 90’s based on how long my grandparents lived for.

1. Practical point - On my mums passing  How does SIPP pension pot get passed down to the 3 children? Do they just split it into 3 pension pots in the 3 names of the 3 kids? I guess it stays in the SIPP and doesn’t just get paid into our bank accounts?

2. Tax point - my understanding is if pension pot is passed down to kids ( after mum is 75) then it is taxed at our marginal rate. So if we are 40 % tax payers then we will pay 40% tax on any money drawn down? Also my understanding is there is no 25% tax free part anymore but please correct me if I am wrong. 

1. Up to the SIPP provider to make that decision (avoids IHT), so important to ensure that your mother has an up to date Expression of Wish form to guide them in taking that decision. It's then up to the recipients to decide whether to have their share transferred to another pension arrangement, or taken as cash.
2. Correct - marginal rate of tax payable. No tax free cash.

ader42

Presumbly your mums house will have appreciated in value beyond the £1million by the time she passes.

Also, it’s not necessary for the pension to be drawndown while the recipients are working and have taxabl eincome, they could leave it invested until they retire.