Legacy to grandchildren

MuddyPaws345

Hello, wise ones! Before going ahead with a SIPP drawdown, I would like to check that doing this is the only option.

The scenario is that my recently deceased husband left a legacy of £10k to each of our two (now adult) grandchildren. Due to long term care home costs for prior to his passing, the bulk of our cash is in a SIPP. I would like to pay the legacies out to my grandchildren, and wonder if there is a more tax efficient way of doing this than simply doing an ad hoc drawdown (adding an amount to cater for the associated income tax) to me, and then passing it on. No IHT will be triggered by this, as it is the only part of the estate which is not transferring to me.

I am thinking along the lines of investing the money for them (if they wish), but unless it is significantly advantageous in terms of the income tax exposure, I will go ahead and draw down the cash.

Thanks in advance for any hot tips, or indeed confirmation that I have understood this correctly.

GrumpyDil

Has the SIPP been transferred to you as the beneficiary and was your husband over 75?

Assuming the SIPP has been transferred to you and your husband was over 75 then yes a drawdown, adjusted for tax would work.

If under 75 then withdrawals aren't taxable.

GrumpyDil

Incidentally pensions are not subject to IHT yet and pass outside of the estate.

Albermarle

 the bulk of our cash is in a SIPP.

Sorry for your loss. Has the SIPP passed to you as a beneficiary? You can not have an 'our' SIPP. It is either still in your husbands name, or it has transferred to you. Which is it ?

You also say :

as it is the only part of the estate which is not transferring to me.

So who is it transferring to ? If it is someone else, how can you be planning to withdraw from it ?

poseidon1

https://forums.moneysavingexpert.com/discussion/6668305/legacy-to-grandchildren

If you are saying, there was insufficient cash in your husband's estate to cover the £20k intended grandchildren legacies, then those legacies failed as far as his will is concerned.

All funds in the Sipp are separate and distinct from the estate, and the only way to tax efficiently redirect any of those funds to the grandchildren is if your husband was under 75 at date of death and the Sipp trustees were prepared to make a direct payment to them from the tax free capital pot.

If you have in fact inherited a drawndown pot, then you will be making a personal gift of the £20k (for IHT purposes) requiring you to survive 7 years thereafter for the gift to be wholly IHT effective, and of course you have will suffered income tax on the funds withdrawn for gifting purposes. Would a £20k withdrawal push you into higher rates of income tax?

Of course the grandchildren ( if not working) could invest the money (over a number of year) in a Sipp of their own and in that way 'recoup' some of the income tax you would have paid, but that is a very long time for grandchildren's ' inheritance' to be tied up when ISAs on their behalf would be more flexible and accessible.

MuddyPaws345

https://forums.moneysavingexpert.com/discussion/comment/81998583#Comment_81998583

Thank you for answering and yes, your assumptions are correct.

MuddyPaws345

https://forums.moneysavingexpert.com/discussion/comment/81998587#Comment_81998587

Thank you for your answer. I still think of it as 'our' funds, but the SIPP has been transferred to me. I was referring to the £20,000 legacy left by my husband to our grandchildren, as being the only part of his estate not transferring to me. I am much clearer on it now, thanks to you and others who have commented.

MuddyPaws345

https://forums.moneysavingexpert.com/discussion/comment/81998638#Comment_81998638

Thank you for clarifying this. Thankfully there is enough in the SIPP to carry out my husband's wishes. If it causes issues with my income tax bracket, I will be able to sort it out with HMRC, I presume. He was over 75 when he passed away, but at least I now understand the rules. Thanks again.

Keep_pedalling

https://forums.moneysavingexpert.com/discussion/comment/81998970#Comment_81998970

In effect this will be a gift from you rather than an inheritance from your husband as it seems his estate did not have the assets to meet this bequest.