SIPP death benefits after April 2027

GDB2222

Can I just check whether my understanding is correct, please.

Assumptions:

1. I die before my wife.
2. I die after age 75
3. The IHT nil rate band will be used up by other assets.

When I die, the SIPP will be passed over to my wife, who can continue to draw an income (on which she will pay income tax), but IHT will not be an issue as the spousal exemption applies.

When she dies the SIPP passes over to our children. IHT will be due at 40% (as the NRB is used up elsewhere), and the IHT can be paid by the SIPP.

If the children want to take money out of the SIPP, it will all be taxed as income, subject to income tax.

DRS1

Whether the kids pay income tax on what they draw from the SIPP depends on how old your wife is when she dies. Under or over 75.

There is also talk of some credit being given for the IHT paid by the SIPP against the income tax charge on withdrawals.

squirrelpie

Has it been decided exactly how the payment of IHT will/can be arranged (from what sources and how quickly etc?). If so a link to an explanation would be appreciated.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81944788#Comment_81944788

AIUI, there originally was talk that the executor would have some discretion whether to pay IHT from a pension pot or other assets. However I think the latest is that the IHT would have to be paid in proportion, with no discretion from the executor. However not 100% sure.

Plus as DRS1 says there seems to be some concession in the offing, to avoid double tax being imposed on pension pot beneficiaries.

squirrelpie

Thanks, so it's not decided yet and any hope of "IHT will be due at 40% (as the NRB is used up elsewhere), and the IHT can be paid by the SIPP" is just that; still a hope.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/81944886#Comment_81944886

What is it you are hoping for?

If we take an example of an estate worth £500k and a SIPP worth £1million and an IHT bill of £600k [Not sure that is possible but you might get there with no NRB of any kind left to use]. In that case I think the original consultation contemplated that the IHT bill would be split pro rata between the estate and the SIPP. So £200k for the estate and £400k for the SIPP.

Are you hoping the executors can allocate all £600k to the SIPP?

That could be contentious if the SIPP beneficiaries are not the same as the estate beneficiaries.

LHW99

One thing at least seems to have been clarified - there will only be 6 months for executors to sort out IHT owed

https://www.pensionsage.com/pa/Treasury-responds-to-Lords-report-on-IHT-and-pensions.php

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81944977#Comment_81944977

Are you hoping the executors can allocate all £600k to the SIPP?

Giving the executors some discretion as to where the pay the IHT from, was 'in the air' at some point, but not sure whether it was just speculation before the consultations started.

That could be contentious if the SIPP beneficiaries are not the same as the estate beneficiaries.

It might also give some useful flexibility, that could suit everybody. However for sure the Executor would have to tread very carefully and probably someobody would get upset at some point.

squirrelpie

I'm not hoping for anything. I was just pointing to the OP's statement.

Marcon

https://forums.moneysavingexpert.com/discussion/comment/81944788#Comment_81944788

Some of the best and most up to date explanations are coming from the large insurers. I thought this was especially useful: https://www.legalandgeneral.com/adviser/annuities/adviser-academy/insight-and-articles/annuities-regulatory-update/

Note in particular:

There are three proposed options available when paying any IHT due under the new regulations:  

• It can be paid from the estate, ie the entire IHT liability is settled, which includes the pension funds before probate application.
• Ask the pension scheme to pay it, if it is £1,000 or more. The pension scheme can use its discretion to pay lower amounts as needed. The pension scheme must settle the tax within 35 days of receiving the request.
• Pay the pension beneficiaries and they pay the IHT directly either to the LPR or to HMRC directly, but this must be agreed and facilitated by the LPR. If the deceased member was over age 75, they may need to request a refund of any overpaid income tax.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81946425#Comment_81946425

The report seems to imply that either the estate or the pension pot will pay all the IHT due. No mention of each paying a proportion, although I assume maybe that is taken as read.

Or I have misunderstood the article.