What to do with SIPP (no dependants)

dunroving

Background details: I'm in my late 60's, in good health, no dependents, have a SIPP valued at around £120k. Total estate on death is currently marginally above IHT (excluding SIPP) but way over IHT threshhold (by about £120k) including SIPP. So, essentially, the SIPP portion of my assets is above the IHT threshold.

The current government's noises regarding pensions and IHT has caused me to look again at my financial situation and reconsider my plans for my estate. As above, I'm not married, and have no dependants. 

There are some questions I've been unable to find definitive answers to - whatever Google terms I use, the answers don't fit the question I'm trying to answer.

Q1: I don't really want to leave the SIPP to a single individual as there is no-one who I think should get such a large chunk of my estate. What would typically happen if I haven't identified a particular individual to have the SIPP or its proceeds (i.e., if the SIPP was simply part of my estate)?

Q2: I'm starting to consider using the SIPP to purchase an annuity. I understand that the 75% "taxable" portion isn't taxed if it's used to purchase an annuity (but that annuity payments would be taxable income). Is it more tax-efficient to take the 25% TFLS as a lump sum payment rather than to use that portion of the SIPP to purchase an annuity? (Hope you understand my logic in saying that - if it's used to buy an annuity, income from that 25% TFLS portion would end up as taxable income).

Re: Q2, It doesn't really matter to me whether I use the 25% as a capital "lump" to drawdown, or whether I use it towards buying the annuity/a guaranteed income. I understand that if I live a long time, I may use up all of that capital "lump", but I'll have sufficient guaranteed income from other sources anyway - so my question about using the 25% TFLS towards an annuity is purely from a tax-efficiency perspective. 

Thanks for any answers - hopefully you will be more helpful than Google. ;-) 

Albermarle

dunroving said:

Background details: I'm in my late 60's, in good health, no dependents, have a SIPP valued at around £120k. Total estate on death is currently marginally above IHT (excluding SIPP) but way over IHT threshhold (by about £120k) including SIPP. So, essentially, the SIPP portion of my assets is above the IHT threshold.

The current government's noises regarding pensions and IHT has caused me to look again at my financial situation and reconsider my plans for my estate. As above, I'm not married, and have no dependants. 

There are some questions I've been unable to find definitive answers to - whatever Google terms I use, the answers don't fit the question I'm trying to answer.

Q1: I don't really want to leave the SIPP to a single individual as there is no-one who I think should get such a large chunk of my estate. What would typically happen if I haven't identified a particular individual to have the SIPP or its proceeds (i.e., if the SIPP was simply part of my estate)? Not naming a beneficiary will not mean the SIPP will become part of your estate. The Trustees of the pension provider will have to decide what to do with it.

Q2: I'm starting to consider using the SIPP to purchase an annuity. I understand that the 75% "taxable" portion isn't taxed if it's used to purchase an annuity (but that annuity payments would be taxable income). Is it more tax-efficient to take the 25% TFLS as a lump sum payment rather than to use that portion of the SIPP to purchase an annuity? (Hope you understand my logic in saying that - if it's used to buy an annuity, income from that 25% TFLS portion would end up as taxable income).
Taking the tax free sum and buying an annuity with the 75% is the normal way of doing it. 
Buying an annuity in any other way means you are in more niche territory, with less providers/competition and a different tax regime.

Re: Q2, It doesn't really matter to me whether I use the 25% as a capital "lump" to drawdown, or whether I use it towards buying the annuity/a guaranteed income. I understand that if I live a long time, I may use up all of that capital "lump", but I'll have sufficient guaranteed income from other sources anyway - so my question about using the 25% TFLS towards an annuity is purely from a tax-efficiency perspective. 

Thanks for any answers - hopefully you will be more helpful than Google. ;-) 

There was a thread with a very similar title recently, so worth having a search for it.

Otherwise you may wish to consider leaving a portion of your assets to charity. 
Gifts to charity are exempt from IHT, and if the gift is big enough it actually reduces any IHT still due on remaining assets,

Marcon

dunroving said:

Background details: I'm in my late 60's, in good health, no dependents, have a SIPP valued at around £120k. Total estate on death is currently marginally above IHT (excluding SIPP) but way over IHT threshhold (by about £120k) including SIPP. So, essentially, the SIPP portion of my assets is above the IHT threshold.

The current government's noises regarding pensions and IHT has caused me to look again at my financial situation and reconsider my plans for my estate. As above, I'm not married, and have no dependants. 

There are some questions I've been unable to find definitive answers to - whatever Google terms I use, the answers don't fit the question I'm trying to answer.

Q1: I don't really want to leave the SIPP to a single individual as there is no-one who I think should get such a large chunk of my estate. What would typically happen if I haven't identified a particular individual to have the SIPP or its proceeds (i.e., if the SIPP was simply part of my estate)?

Q2: I'm starting to consider using the SIPP to purchase an annuity. I understand that the 75% "taxable" portion isn't taxed if it's used to purchase an annuity (but that annuity payments would be taxable income). Is it more tax-efficient to take the 25% TFLS as a lump sum payment rather than to use that portion of the SIPP to purchase an annuity? (Hope you understand my logic in saying that - if it's used to buy an annuity, income from that 25% TFLS portion would end up as taxable income).

Re: Q2, It doesn't really matter to me whether I use the 25% as a capital "lump" to drawdown, or whether I use it towards buying the annuity/a guaranteed income. I understand that if I live a long time, I may use up all of that capital "lump", but I'll have sufficient guaranteed income from other sources anyway - so my question about using the 25% TFLS towards an annuity is purely from a tax-efficiency perspective. 

Thanks for any answers - hopefully you will be more helpful than Google. ;-) 

Q1 - until the final legislation is known, there's little point in acting in anticipation of changes which won't come in until 2027 at the earliest, so for now this is a bit of a 'non question' because the SIPP won't be 'simply part of your estate'. Under current legislation, the SIPP provider will take into account any wishes you've expressed in your Expression of Wish form, so make sure that is up to date and covers the way you'd like your SIPP shared out if you die before 2027. Revisit the position nearer the time of any legislative changes.
Q2 - depends on your tax rate(s) and I'm assuming you are referring to income tax rather than IHT. If using the whole SIPP to buy an annuity pushes you into a higher tax bracket then taking some tax free cash would make sense. If you take 25% as a tax free lump sum, you could use that 25% after you've withdrawn it from the SIPP to buy a non-pension annuity; part of each payment would be treated as a return of capital and not subject to tax. If you use the other 75% to buy an annuity, those payments would be taxable.

dunroving

Albermarle said:

dunroving said:

Background details: I'm in my late 60's, in good health, no dependents, have a SIPP valued at around £120k. Total estate on death is currently marginally above IHT (excluding SIPP) but way over IHT threshhold (by about £120k) including SIPP. So, essentially, the SIPP portion of my assets is above the IHT threshold.

The current government's noises regarding pensions and IHT has caused me to look again at my financial situation and reconsider my plans for my estate. As above, I'm not married, and have no dependants. 

There are some questions I've been unable to find definitive answers to - whatever Google terms I use, the answers don't fit the question I'm trying to answer.

Q1: I don't really want to leave the SIPP to a single individual as there is no-one who I think should get such a large chunk of my estate. What would typically happen if I haven't identified a particular individual to have the SIPP or its proceeds (i.e., if the SIPP was simply part of my estate)? Not naming a beneficiary will not mean the SIPP will become part of your estate. The Trustees of the pension provider will have to decide what to do with it.

Q2: I'm starting to consider using the SIPP to purchase an annuity. I understand that the 75% "taxable" portion isn't taxed if it's used to purchase an annuity (but that annuity payments would be taxable income). Is it more tax-efficient to take the 25% TFLS as a lump sum payment rather than to use that portion of the SIPP to purchase an annuity? (Hope you understand my logic in saying that - if it's used to buy an annuity, income from that 25% TFLS portion would end up as taxable income).
Taking the tax free sum and buying an annuity with the 75% is the normal way of doing it. 
Buying an annuity in any other way means you are in more niche territory, with less providers/competition and a different tax regime.

Re: Q2, It doesn't really matter to me whether I use the 25% as a capital "lump" to drawdown, or whether I use it towards buying the annuity/a guaranteed income. I understand that if I live a long time, I may use up all of that capital "lump", but I'll have sufficient guaranteed income from other sources anyway - so my question about using the 25% TFLS towards an annuity is purely from a tax-efficiency perspective. 

Thanks for any answers - hopefully you will be more helpful than Google. ;-) 

There was a thread with a very similar title recently, so worth having a search for it.

Otherwise you may wish to consider leaving a portion of your assets to charity. 
Gifts to charity are exempt from IHT, and if the gift is big enough it actually reduces any IHT still due on remaining assets,

Thank you - the idea of leaving everything over IHT threshold to charity is definitely on the radar - though I still need to know how the SIPP is treated in that situation. For example, would the SIPP provider simply transfer the capital in the SIPP to the charity, or would the SIPP provider have to transfer the SIPP to the executor/estate, in which case does it create a complicated tax situation? What if I have named several charities, how would the SIPP be divided, etc.)

I've come to realise that for people without dependents, a SIPP causes complications. Ideally, I'd just like to "get rid" of the SIPP to simplify things.

I did search for similar threads, but couldn't find anything similar. I'll try again tomorrow. 

dunroving

Marcon said:

dunroving said:

Background details: I'm in my late 60's, in good health, no dependents, have a SIPP valued at around £120k. Total estate on death is currently marginally above IHT (excluding SIPP) but way over IHT threshhold (by about £120k) including SIPP. So, essentially, the SIPP portion of my assets is above the IHT threshold.

The current government's noises regarding pensions and IHT has caused me to look again at my financial situation and reconsider my plans for my estate. As above, I'm not married, and have no dependants. 

There are some questions I've been unable to find definitive answers to - whatever Google terms I use, the answers don't fit the question I'm trying to answer.

Q1: I don't really want to leave the SIPP to a single individual as there is no-one who I think should get such a large chunk of my estate. What would typically happen if I haven't identified a particular individual to have the SIPP or its proceeds (i.e., if the SIPP was simply part of my estate)?

Q2: I'm starting to consider using the SIPP to purchase an annuity. I understand that the 75% "taxable" portion isn't taxed if it's used to purchase an annuity (but that annuity payments would be taxable income). Is it more tax-efficient to take the 25% TFLS as a lump sum payment rather than to use that portion of the SIPP to purchase an annuity? (Hope you understand my logic in saying that - if it's used to buy an annuity, income from that 25% TFLS portion would end up as taxable income).

Re: Q2, It doesn't really matter to me whether I use the 25% as a capital "lump" to drawdown, or whether I use it towards buying the annuity/a guaranteed income. I understand that if I live a long time, I may use up all of that capital "lump", but I'll have sufficient guaranteed income from other sources anyway - so my question about using the 25% TFLS towards an annuity is purely from a tax-efficiency perspective. 

Thanks for any answers - hopefully you will be more helpful than Google. ;-) 

Q1 - until the final legislation is known, there's little point in acting in anticipation of changes which won't come in until 2027 at the earliest, so for now this is a bit of a 'non question' because the SIPP won't be 'simply part of your estate'. Under current legislation, the SIPP provider will take into account any wishes you've expressed in your Expression of Wish form, so make sure that is up to date and covers the way you'd like your SIPP shared out if you die before 2027. Revisit the position nearer the time of any legislative changes.
Q2 - depends on your tax rate(s) and I'm assuming you are referring to income tax rather than IHT. If using the whole SIPP to buy an annuity pushes you into a higher tax bracket then taking some tax free cash would make sense. If you take 25% as a tax free lump sum, you could use that 25% after you've withdrawn it from the SIPP to buy a non-pension annuity; part of each payment would be treated as a return of capital and not subject to tax. If you use the other 75% to buy an annuity, those payments would be taxable.

Ah, thank you - the last part tells me something I hadn't realised. If I understand correctly, you are saying that buying a non-pension annuity would mean the annuity payments are not subject to income tax?

I've never considered buying an annuity before (because the rates were pretty rubbish, and my family genetics include early mortality for males), so it's been a steep learning curve coming around to this idea.

I understand your point about waiting for legislation, and don't normally make knee-jerk decisions, but part of me is OK with the idea of anything over IHT going to charity. A primary concern is whether leaving a SIPP to multiple people would lead to complications (regardless of whether they are named in the Expression of Wishes form or in the will). 

Marcon

dunroving said:

Marcon said:

dunroving said:

Background details: I'm in my late 60's, in good health, no dependents, have a SIPP valued at around £120k. Total estate on death is currently marginally above IHT (excluding SIPP) but way over IHT threshhold (by about £120k) including SIPP. So, essentially, the SIPP portion of my assets is above the IHT threshold.

The current government's noises regarding pensions and IHT has caused me to look again at my financial situation and reconsider my plans for my estate. As above, I'm not married, and have no dependants. 

There are some questions I've been unable to find definitive answers to - whatever Google terms I use, the answers don't fit the question I'm trying to answer.

Q1: I don't really want to leave the SIPP to a single individual as there is no-one who I think should get such a large chunk of my estate. What would typically happen if I haven't identified a particular individual to have the SIPP or its proceeds (i.e., if the SIPP was simply part of my estate)?

Q2: I'm starting to consider using the SIPP to purchase an annuity. I understand that the 75% "taxable" portion isn't taxed if it's used to purchase an annuity (but that annuity payments would be taxable income). Is it more tax-efficient to take the 25% TFLS as a lump sum payment rather than to use that portion of the SIPP to purchase an annuity? (Hope you understand my logic in saying that - if it's used to buy an annuity, income from that 25% TFLS portion would end up as taxable income).

Re: Q2, It doesn't really matter to me whether I use the 25% as a capital "lump" to drawdown, or whether I use it towards buying the annuity/a guaranteed income. I understand that if I live a long time, I may use up all of that capital "lump", but I'll have sufficient guaranteed income from other sources anyway - so my question about using the 25% TFLS towards an annuity is purely from a tax-efficiency perspective. 

Thanks for any answers - hopefully you will be more helpful than Google. ;-) 

Q1 - until the final legislation is known, there's little point in acting in anticipation of changes which won't come in until 2027 at the earliest, so for now this is a bit of a 'non question' because the SIPP won't be 'simply part of your estate'. Under current legislation, the SIPP provider will take into account any wishes you've expressed in your Expression of Wish form, so make sure that is up to date and covers the way you'd like your SIPP shared out if you die before 2027. Revisit the position nearer the time of any legislative changes.
Q2 - depends on your tax rate(s) and I'm assuming you are referring to income tax rather than IHT. If using the whole SIPP to buy an annuity pushes you into a higher tax bracket then taking some tax free cash would make sense. If you take 25% as a tax free lump sum, you could use that 25% after you've withdrawn it from the SIPP to buy a non-pension annuity; part of each payment would be treated as a return of capital and not subject to tax. If you use the other 75% to buy an annuity, those payments would be taxable.

Ah, thank you - the last part tells me something I hadn't realised. If I understand correctly, you are saying that buying a non-pension annuity would mean the annuity payments are not subject to income tax?

Not quite what I said: '...you could use that 25% after you've withdrawn it from the SIPP to buy a non-pension annuity; part of each payment [from the non-pension annuity] would be treated as a return of capital and not subject to tax.'

Any annuity you buy 'directly' from your pension fund means that the instalments are all potentially taxable in full. 

dunroving said:

I understand your point about waiting for legislation, and don't normally make knee-jerk decisions, but part of me is OK with the idea of anything over IHT going to charity. A primary concern is whether leaving a SIPP to multiple people would lead to complications (regardless of whether they are named in the Expression of Wishes form or in the will). 

Leaving a SIPP to multiple beneficiaries doesn't usually lead to complications if you have an up to date EOW and provide appropriate contact details/a clear indication of how you'd like the money divided (including what would happen if one potential beneficiary predeceases you). You could ask for your SIPP to be paid to your executors - under current legislation, paying it to them (ie your estate) will not be subject to IHT provided the payment is at the discretion of the SIPP provider - and the executors can then distribute according to the terms of your will. 

af1963

I have used three different pension and SIPP providers, who all allow specific charities to be named as beneficiaries, either as main beneficiaries or as alternative beneficiaries in the event that the main beneficiaries are not alive to inherit.  ( The latter may not be relevant for you, but might be for others reading.) 

The process is different for each, but all allow you to specify the percentage that you'd like to go to each charity.

There's a fairly obscure tax rule that says charities must pay a tax charge if they receive a legacy ( edit for clarity: specifically from a pension, and after age 75) while any dependents of the deceased are still alive. Again, this sounds like it's not relevant to you either.

If you expect to leave a legacy to charity, and are confident you will have enough funds to be able to give them some of it up front, one tax efficient way to do it is to take funds out of the tax free part of the SIPP and make a corresponding gift aided donation from the other taxable income that you mention.  That allows them to reclaim tax that you've paid on that other income ( like all Gift Aid, you need to have paid enough tax to cover what they will reclaim.).And they get the money a bit earlier.

If you use all of your TFC this way, it does mean you're liable to pay tax on all further withdrawals, but you may never need to make these, and even if you do you're no worse off.  Then if you're unlucky enough to die before age 75, the balance can be inherited tax free.  Over 75, the whole remaining sum may be taxed, whether or not you've taken the TFC.

Marcon

af1963 said:

I have used three different pension and SIPP providers, who all allow specific charities to be named as beneficiaries, either as main beneficiaries or as alternative beneficiaries in the event that the main beneficiaries are not alive to inherit.  ( The latter may not be relevant for you, but might be for others reading.) 

The process is different for each, but all allow you to specify the percentage that you'd like to go to each charity.

There's a fairly obscure tax rule that says charities must pay a tax charge if they receive a legacy while any dependents of the deceased are still alive. Again, this sounds like it's not relevant to you either.

Could you give more information and the relevant legislative reference please? 

af1963

Marcon said:

There's a fairly obscure tax rule that says charities must pay a tax charge if they receive a legacy while any dependents of the deceased are still alive. Again, this sounds like it's not relevant to you either.

Could you give more information and the relevant legislative reference please? 

I'm not a tax lawyer so am quoting based on other online sources I've come across.   Here's one such:

https://www.investcentre.co.uk/articles/charitable-giving-pensions

Charities can be the recipients of an authorised lump sum death benefit payment from a pension scheme. If the member was aged 75 or over when they died, or if the member was under 75 but the payment was not designated until more than two years after the date the scheme was aware of (or should reasonably have been aware of) the member’s death, the payment will be taxable. As a charity is set up as either a trust or a company, it is a non-qualifying person, and tax will be charged at the special lump sum death benefit charge rate of 45%.

However, if certain conditions are met, the lump sum may be paid as a charity lump sum death benefit. A
charity lump sum death benefit is paid tax free, so the special lump sum death benefit charge does not apply.

A charity lump sum death benefit may only be paid from money purchase arrangements. It can be paid following the death of a member of a money purchase arrangement where:

• there are no dependants of the member; and

• the member has nominated the charity as a beneficiary.

If the member leaves no dependants, but hasn’t nominated a charity, a lump sum cannot be paid as a charity
lump sum death benefit. The lump sum also won’t qualify if the member has nominated a charity but there is a living dependant.

af1963

 ... and a tax manual reference:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm073900

I've edited the original post to clarify that it applies to payments inherited from DC pensions - using "legacy" earlier may sound like it applies to money left in an estate, which it doesn't. 

Marcon

af1963 said:

 ... and a tax manual reference:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm073900

I've edited the original post to clarify that it applies to payments inherited from DC pensions - using "legacy" earlier may sound like it applies to money left in an estate, which it doesn't. 

Very many thanks for your helpful answers. That's exactly what it did originally suggest - hence my question! It'll be interesting to see how this particular bit of legislation is handled come the proposed changes to pensions and IHT in 2027...