What to do with SIPP (no dependants)

dunroving

Marcon said:

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. 

Thanks for your patient reply - I  read your first post in a rush as I was about to shut the laptop down for the day. I've now read a few sources on "non-pension" annuities ("lifetime purchase annuities"?) and now understand the point you were making. 

Re: income tax, taking an annuity using the 75% part of my SIPP won't take me into the 40% threshold - though if the Goevrnment extends the income tax threshold freeze past the current planned time frame, that is possible (because several of my income sources are linked to inflation, etc.) - but this would occur anyway if I left the 75% where it is, and took sums via drawdown - though I'd have more flexibility for tax planning if I did this..

I think what also puts me off about leaving the SIPP "as is" is that the wording is usually that EOW are implemented "at the discretion of the trustees". I don't know how often they overrule the EOW form, but it does feel like it adds a layer of uncertainty.

I suppose these are nice problems to have (having an estate that's over the IHT threshold), but as someone who came from a single-parent council flat background, had zero capital at age 40 and dragged my financial situation to where it is through sheer hard work, it really annoys me that the Government would take 40% of any part of my estate after I'm gone. I'd rather leave that part to charities and know (or hope!) they wouldn't be taxed on it. 

dunroving

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 ( 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.

Thanks, that's very helpful. I've just read "Die with Zero", and although I completely understand the "Do it now" idea (give gifts, donate to charity, etc. while I'm still here), it's in my DNA to hold onto money "Just in case". I think that's pretty common in people who come from low-income backgrounds, and it's difficult to shake off. I'm working on it, though. 

Marcon

dunroving said:

Marcon said:

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. 

Thanks for your patient reply - I  read your first post in a rush as I was about to shut the laptop down for the day. I've now read a few sources on "non-pension" annuities ("lifetime purchase annuities"?) and now understand the point you were making. 

Re: income tax, taking an annuity using the 75% part of my SIPP won't take me into the 40% threshold - though if the Goevrnment extends the income tax threshold freeze past the current planned time frame, that is possible (because several of my income sources are linked to inflation, etc.) - but this would occur anyway if I left the 75% where it is, and took sums via drawdown - though I'd have more flexibility for tax planning if I did this..

I think what also puts me off about leaving the SIPP "as is" is that the wording is usually that EOW are implemented "at the discretion of the trustees". I don't know how often they overrule the EOW form, but it does feel like it adds a layer of uncertainty.

I suppose these are nice problems to have (having an estate that's over the IHT threshold), but as someone who came from a single-parent council flat background, had zero capital at age 40 and dragged my financial situation to where it is through sheer hard work, it really annoys me that the Government would take 40% of any part of my estate after I'm gone. I'd rather leave that part to charities and know (or hope!) they wouldn't be taxed on it. 

Not very often, especially if the EOW is reasonably up to date (which is why it's worth 'redoing' it every couple of years even if you aren't actually making any changes), clear and they can actually find the beneficiaries. Adding a mobile and email for each as well as a physical address is always a good idea; few EOW forms ask for this, but there's nothing to stop you adding anything at all you think would be helpful.

Albermarle

I think what also puts me off about leaving the SIPP "as is" is that the wording is usually that EOW are implemented "at the discretion of the trustees". I don't know how often they overrule the EOW form, but it does feel like it adds a layer of uncertainty.

Problems typically occur where the EOW is out of date. For example it names an ex Spouse, 10 years after they have been divorced and the deceased has remarried but never changed the form. 

Found the other thread.
Retirement for someone with no dependents — MoneySavingExpert Forum

dunroving

Albermarle said:

I think what also puts me off about leaving the SIPP "as is" is that the wording is usually that EOW are implemented "at the discretion of the trustees". I don't know how often they overrule the EOW form, but it does feel like it adds a layer of uncertainty.

Problems typically occur where the EOW is out of date. For example it names an ex Spouse, 10 years after they have been divorced and the deceased has remarried but never changed the form. 

Found the other thread.
Retirement for someone with no dependents — MoneySavingExpert Forum

Thanks for looking up the other thread! Looks like it has a lot of replies, so I will set aside for a time when I can sit and digest properly.