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Inheriting a SIPP before / after 75 - what's the rationale?

mickeypops
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Inheriting a SIPP before / after 75 - what's the rationale?

#174240

Postby mickeypops » October 16th, 2018, 7:54 pm

This isn't a problem exactly, just something that puzzles me. I know that a SIPP inherited before the deceased is 75 can be withdrawn with no tax to pay, but withdrawals are taxable at the new owners marginal rate if the deceased is over 75.

Does anyone know why this is the case - what difference does it make if the deceased is 74 or 76?

Just wondered!

Thanks

MP

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#174376

Postby ursaminortaur » October 17th, 2018, 10:34 am

mickeypops wrote:This isn't a problem exactly, just something that puzzles me. I know that a SIPP inherited before the deceased is 75 can be withdrawn with no tax to pay, but withdrawals are taxable at the new owners marginal rate if the deceased is over 75.

Does anyone know why this is the case - what difference does it make if the deceased is 74 or 76?

Just wondered!

Thanks

MP


Historically drawdown before and after age 75 were treated differently. Indeed up until A-Day in 2006 you had to buy an annuity at that point.
After 2006 though a form of drawdown called an Alternatively secured Pension (ASP) was introduced which had more stringent limits on the amount you could drawdown compared to drawdown before age 75 and also had a 70% tax charge applied to inheritence from such a drawdown fund. The government at that time wasn't really encouraging people to use ASP.

https://www.retirementreinvented.com/Articles/59462/Retirement_Reinvented/Managing_Money/Alternatively_Secured_Pensions.aspx


The Treasury later said that they had not meant ASPs to be generally available, but were restricted to Plymouth Brethren who have a religious objection to gambling, and hence to the purchase of an annuity.
.
.
.
Apart from illustrating the remarkable lobbying power of the Plymouth Brethren, this did little to clear up the uncertainty as to what alternatives if any are available to purchasing an annuity at age 75, but following the Chancellor's autumn statement it was announced that ASPs can still be passed on to spouses and certain financial dependants free of inheritance tax, but when they die a 70% tax charge will be levied. Meanwhhile the holder of an ASP has to draw an income from it which is equiavalent to a minimum of 65% and a maximum of 90% of a benchmark annuity rate applicable to someone aged 75.


The current situation is a bit of an anomaly since most of those distinctions between drawdown pre and post 75 have been removed. The one remaining distinction, which might be used by the government as an excuse for this difference in treatment for inheritence purposes, though is that there is a final LTA test at age 75 and hence, since after 75 there isn't any LTA test on death, any growth in the fund after that age which then takes you over the LTA limit will never be caught.

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184016

Postby Bouleversee » November 30th, 2018, 3:59 pm

Even more interesting is the rationale between any IHT relief on pension funds, which have had income tax relief on contributions, and no IHT relief on ISAs which have been accumulated from income which has been taxed, possibly at higher rate. Perhaps someone could justify that differential.

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184028

Postby OLTB » November 30th, 2018, 4:39 pm

Bouleversee wrote:Even more interesting is the rationale between any IHT relief on pension funds, which have had income tax relief on contributions, and no IHT relief on ISAs which have been accumulated from income which has been taxed, possibly at higher rate. Perhaps someone could justify that differential.


You could always transfer the ISAs into BPR qualifying AIM ISAs and they wouldn't attract IHT after two years. Potentially higher risk though than bog-standard ISAs, and you could always ask a fund manager to manage the assets to ensure the shares maintained their BPR qualifying status.

Cheers, OLTB.

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184030

Postby Bouleversee » November 30th, 2018, 4:52 pm

I know that but that isn't answering my question or justifying the status quo. In any case, it's highly likely that the IHT concession for AIM shares held for more than 2 years will be withdrawn.

I find bog standard ISAs pretty risky anyway. One of mine is over 25% down despite being in several different holdings, only 2 of which are in profit :cry: .

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184059

Postby scrumpyjack » November 30th, 2018, 7:47 pm

I suppose in theory the pension fund does not belong to the deceased or his estate. It belongs to trustees who have wide discretion on what to do with it, though normally they will 'take into account' any documented wishes of the deceased.

But the whole BPR thing is ludicrous. It discriminates against people who don't put their wealth in certain types of asset.
There may be an argument for having some relief to stop family businesses collapsing due to tax liabilities but there is no logical reason to give private investors in some AIM shares a break, nor to let Dyson escape tax on his huge estates.

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184069

Postby Bouleversee » November 30th, 2018, 9:05 pm

scrumpyjack wrote:I suppose in theory the pension fund does not belong to the deceased or his estate. It belongs to trustees who have wide discretion on what to do with it, though normally they will 'take into account' any documented wishes of the deceased.

But the whole BPR thing is ludicrous. It discriminates against people who don't put their wealth in certain types of asset.
There may be an argument for having some relief to stop family businesses collapsing due to tax liabilities but there is no logical reason to give private investors in some AIM shares a break, nor to let Dyson escape tax on his huge estates.


I don't follow that at all. My husband didn't have a SIPP (just annuities and ISAs) but I had assumed that a SIPP became part of the estate, in exactly the same way as an ISA, to be distributed by the executor (after probate and any tax due) according to the will. Is that not how it works, then? I know that if the deceased is over 75, heirs will be taxed on withdrawals at their marginal rate but that can presumably can be managed.

I really don't understand why our tax laws have to be so complicated and so subject to chance and getting the best advice at a sufficiently early date. Money is money is money. Inheritance should not be a lottery.

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184073

Postby scrumpyjack » November 30th, 2018, 10:02 pm

No Pension funds, whether in drawdown or not, are not part of the estate, they are not included in probate nor in the IHT calculation

Hence there is an advantage at present for IHT purposes, in using non pension assets first during retirement so that you diminish the assets subject to IHT first and the pension assets after that if necessary.

The pension fund can then go to your heirs without IHT and they can leave it their heirs also!

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184126

Postby ursaminortaur » December 1st, 2018, 10:53 am

scrumpyjack wrote:No Pension funds, whether in drawdown or not, are not part of the estate, they are not included in probate nor in the IHT calculation

Hence there is an advantage at present for IHT purposes, in using non pension assets first during retirement so that you diminish the assets subject to IHT first and the pension assets after that if necessary.

The pension fund can then go to your heirs without IHT and they can leave it their heirs also!


As far as I am aware pensions have always been potentially outside of IHT so long as you fill out an expression of wish form stating who you would like to pass the funds to and give that to your pension provider. From what I have read it gets around IHT because the pension company is not legally bound to follow those wishes it is just an indication of the client's wishes.

https://www.investcentre.co.uk/sites/default/files/AJBIC_SIPP_Expression_of_wishes_guide_and_nomination_form.pdf

Can I give you a binding instruction rather than an expression of wishes?
No, we do not accept binding instructions, as giving a binding instruction would make it very likely that the benefits would be subject
to Inheritance Tax.
Where payment of death benefits is made at the discretion of AJ Bell, as the scheme administrator, this significantly reduces the
chances that some or all of your pension will be subject to Inheritance
Tax after your death.


In most cases the pension provider will follow the clients wishes as expressed in the form but there are circumstances in which the pension provider may deviate from that course.

https://www.moneymarketing.co.uk/issues/19-april-2018/neil-macgillivray-expression-wish-forms-can-let-clients/

All of that said, to imply that a pension provider will act merely on the guidance provided through an expression of wish is reckless to say the least.

The majority of pension schemes give the scheme administrators/trustees discretion as to whom they pay death benefits to. It is a big responsibility and should not be taken lightly. For it to be effective to avoid inheritance tax, the pension provider must be able to demonstrate it has used its discretion.

Perhaps of more importance is that there is a duty of care on the administrators/trustees to consider who they should pay the benefits to.

As well as looking at the expression of wish, the provider should enquire about the terms of the deceased’s will, if one has been made, and obtain details of marriage status, children and other financial dependants. It is also not unrealistic to ask for evidence of financial dependency where the situation is uncertain.



This question of binding versus discretionary instructions to trusteees does raise an interesting question with respect to ISAs.
ISAs are restricted to being held in nominee accounts which mean that the legal owner of the assets is generally a non-trading subsiduary of the broker with the client being the beneficial owner ie it is a trust. Hence prima facie it would appear that ISA providers should be able to treat the distribution of assets to beneficiaries in the same manner as pensions if they accepted a discretionary expression of the wishes of the client and hence avoid the ISA being part of the clients estate and thus escape IHT. I'm not a lawyer so there are probably other factors which mean that this isn't true but at first glance the situations seem comparable. Of course I'm not aware of any ISA providers who accept expression of wishes forms for their ISA clients so even if it were likely to be correct it is difficult to see it being tested in court anytime soon.
(Of course if it were true then it would potentially open a floodgate since all nominee accounts are trusts and hence I'd expect the government to quickly act to block such bypassing of IHT - possibly even ending it for pensions).

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184134

Postby DrBunsenHoneydew » December 1st, 2018, 11:41 am

I've just checked with various ISA Terms & Conditions. There is no "discretion" upon the death of a holder, so the proceeds will fall into the Estate (if not claimed as a new dead spouse ISA), e.g. this is what Lloyds says ("we will"):
When we receive notice to close a deceased’s ISA account, we will send a cheque for the balance and any interest earned up to the date of closure to the executors of the deceased’s estate. If we do not receive notice to close an ISA following the death of the account holder, the account will stop qualifying as an ISA 3 years from the date of death and we will transfer the balance and any interest earned during the 3 years to a new account paying interest at a rate equivalent to our Easy Saver rate.

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184137

Postby Bouleversee » December 1st, 2018, 12:20 pm

There was certainly no discretion involved re my husband's ISAs; they were just transferred to the executors account and disposed of according to the will. He no longer had a pension as he decided to buy an annuity with his personal pension after the Equitable Life debacle.

It's all nonsense, isn't it? What possible discretion could the administrators apply? They know nothing about the family circumstances so what grounds could they have for not following the expression of wishes, though I suppose if the expression of wishes hadn't been updated following changes in the law or circumstances, and it made more sense for the distribution not to follow it, discretion to depart from it could be useful. I wonder if that ever happens. It could be a minefield, especially if it was at variance with an existing will.

Anyway, it still doesn't justify why pensions should get this concession and ISAs not!

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184144

Postby PinkDalek » December 1st, 2018, 12:49 pm

Bouleversee wrote:...It's all nonsense, isn't it? What possible discretion could the administrators apply? They know nothing about the family circumstances so what grounds could they have for not following the expression of wishes, though I suppose if the expression of wishes hadn't been updated following changes in the law or circumstances, and it made more sense for the distribution not to follow it, discretion to depart from it could be useful. I wonder if that ever happens. It could be a minefield, especially if it was at variance with an existing will...


Random article linked to below, which confirms the part of your post above re changes in circumstances and, yes, it does happen.

Millions warned over pension inheritance disputes
Make sure your paperwork is up to date or there could be confusion over who the beneficiary should be.

https://www.telegraph.co.uk/finance/per ... putes.html

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184147

Postby PinkDalek » December 1st, 2018, 1:07 pm

DrBunsenHoneydew wrote:I've just checked with various ISA Terms & Conditions. There is no "discretion" upon the death of a holder, so the proceeds will fall into the Estate (if not claimed as a new dead spouse ISA), e.g. this is what Lloyds says ("we will"):
When we receive notice to close a deceased’s ISA account, we will send a cheque for the balance and any interest earned up to the date of closure to the executors of the deceased’s estate. If we do not receive notice to close an ISA following the death of the account holder, the account will stop qualifying as an ISA 3 years from the date of death and we will transfer the balance and any interest earned during the 3 years to a new account paying interest at a rate equivalent to our Easy Saver rate.


That appears to reflect the changes made by the ISA Regulations SI 2017/1089 for deaths on or after 6 April 2018 (other than re Junior ISAs):

http://www.legislation.gov.uk/uksi/2017/1089/made
https://www.gov.uk/government/publicati ... unt-holder

Extract from the latter:

These changes will allow the ISA Regulations to provide income tax exemption and relief from capital gains tax for ‘administration-period investments’. These are investments an ISA saver held in their account immediately before their death.

Such that there should be no charge to Income Tax or CGT on investments formerly held in an ISA by the deceased and retained there, until the earliest of:

3 years after decease;
Finalisation of the Estate administration;
Closure of the account.

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184164

Postby Bouleversee » December 1st, 2018, 2:49 pm

PinkDalek wrote:
Bouleversee wrote:...It's all nonsense, isn't it? What possible discretion could the administrators apply? They know nothing about the family circumstances so what grounds could they have for not following the expression of wishes, though I suppose if the expression of wishes hadn't been updated following changes in the law or circumstances, and it made more sense for the distribution not to follow it, discretion to depart from it could be useful. I wonder if that ever happens. It could be a minefield, especially if it was at variance with an existing will...


Random article linked to below, which confirms the part of your post above re changes in circumstances and, yes, it does happen.

Millions warned over pension inheritance disputes
Make sure your paperwork is up to date or there could be confusion over who the beneficiary should be.

https://www.telegraph.co.uk/finance/per ... putes.html


Thanks for that, PD. My imagination had already run riot contemplating all the contentious scenarios that could arise. I wonder if the trustees/administrators send a reminder to update the EofW with the annual valuations. If not, they should do so as I doubt that many people give it a further thought or even remember they have submitted it on first joining. I note that it says it usually arises in connection with company pensions. I can't see many platforms wanting to get involved in discretionary decisions in the case of SIPPs. I must ask my sprogs whether they had to fill in such a form when they opened their SIPPS recently.

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184166

Postby Bouleversee » December 1st, 2018, 2:54 pm

PinkDalek wrote:
DrBunsenHoneydew wrote:I've just checked with various ISA Terms & Conditions. There is no "discretion" upon the death of a holder, so the proceeds will fall into the Estate (if not claimed as a new dead spouse ISA), e.g. this is what Lloyds says ("we will"):
When we receive notice to close a deceased’s ISA account, we will send a cheque for the balance and any interest earned up to the date of closure to the executors of the deceased’s estate. If we do not receive notice to close an ISA following the death of the account holder, the account will stop qualifying as an ISA 3 years from the date of death and we will transfer the balance and any interest earned during the 3 years to a new account paying interest at a rate equivalent to our Easy Saver rate.


That appears to reflect the changes made by the ISA Regulations SI 2017/1089 for deaths on or after 6 April 2018 (other than re Junior ISAs):

http://www.legislation.gov.uk/uksi/2017/1089/made
https://www.gov.uk/government/publicati ... unt-holder

Extract from the latter:

These changes will allow the ISA Regulations to provide income tax exemption and relief from capital gains tax for ‘administration-period investments’. These are investments an ISA saver held in their account immediately before their death.

Such that there should be no charge to Income Tax or CGT on investments formerly held in an ISA by the deceased and retained there, until the earliest of:

3 years after decease;
Finalisation of the Estate administration;
Closure of the account.


What a pity that wasn't in force when my husband died. I thought the situation that applied then was very unfair so am glad it has been changed, albeit too late for me.

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184791

Postby Charlottesquare » December 4th, 2018, 11:30 pm

Bouleversee wrote:
PinkDalek wrote:
DrBunsenHoneydew wrote:I've just checked with various ISA Terms & Conditions. There is no "discretion" upon the death of a holder, so the proceeds will fall into the Estate (if not claimed as a new dead spouse ISA), e.g. this is what Lloyds says ("we will"):


That appears to reflect the changes made by the ISA Regulations SI 2017/1089 for deaths on or after 6 April 2018 (other than re Junior ISAs):

http://www.legislation.gov.uk/uksi/2017/1089/made
https://www.gov.uk/government/publicati ... unt-holder

Extract from the latter:

These changes will allow the ISA Regulations to provide income tax exemption and relief from capital gains tax for ‘administration-period investments’. These are investments an ISA saver held in their account immediately before their death.

Such that there should be no charge to Income Tax or CGT on investments formerly held in an ISA by the deceased and retained there, until the earliest of:

3 years after decease;
Finalisation of the Estate administration;
Closure of the account.


What a pity that wasn't in force when my husband died. I thought the situation that applied then was very unfair so am glad it has been changed, albeit too late for me.


Do remember that where a deceased spouse (and civil partners) held ISAs then the inheriting spouse is permitted to reinvest in ISAs up to the value encashed by the spouse in addition to their normal annual limit, this allows the surviving spouse to tax shelter the ISA proceeds rather than having to feed them into ISAs over years using their annual allowance and can help avoid a soaring annual income tax bill. Note there are time limits.

https://www.gov.uk/guidance/manage-addi ... nto-an-isa

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184796

Postby PinkDalek » December 5th, 2018, 12:37 am

Charlottesquare wrote:Do remember that where a deceased spouse (and civil partners) held ISAs then the inheriting spouse is permitted to reinvest in ISAs up to the value encashed by the spouse in addition to their normal annual limit, this allows the surviving spouse to tax shelter the ISA proceeds rather than having to feed them into ISAs over years using their annual allowance and can help avoid a soaring annual income tax bill. Note there are time limits.

https://www.gov.uk/guidance/manage-addi ... nto-an-isa


In case you wish to add anything to an earlier Topic at Taxes, the Additional Permitted Subscription rules, in so far as they then applied to Bouleversee's situation, were gone into in some detail here:

viewtopic.php?p=56354#p56354

I think but am not certain that Boulee resolved the various issues.

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Re: Inheriting a SIPP before / after 75 - what's the rationale?

#184800

Postby Charlottesquare » December 5th, 2018, 12:50 am

PinkDalek wrote:
Charlottesquare wrote:Do remember that where a deceased spouse (and civil partners) held ISAs then the inheriting spouse is permitted to reinvest in ISAs up to the value encashed by the spouse in addition to their normal annual limit, this allows the surviving spouse to tax shelter the ISA proceeds rather than having to feed them into ISAs over years using their annual allowance and can help avoid a soaring annual income tax bill. Note there are time limits.

https://www.gov.uk/guidance/manage-addi ... nto-an-isa


In case you wish to add anything to an earlier Topic at Taxes, the Additional Permitted Subscription rules, in so far as they then applied to Bouleversee's situation, were gone into in some detail here:

viewtopic.php?p=56354#p56354

I think but am not certain that Boulee resolved the various issues.


No, merely flagging them as came across them with a client a couple of years ago. Was not aware they had been mentioned so thought they might be helpful.


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