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SIPP Inheritance

JeffW55
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SIPP Inheritance

#216296

Postby JeffW55 » April 20th, 2019, 8:10 am

Hi,
My wife and I have retired and have more than adequate income and savings for now and the future, including after my exit.
I have an additional SIPP that is still in the accumulation phase (all other 'pensions' are occupational pensions, state pension or annuities, from which I have been receiving income for a number of years).
Recently, one of my occupational pensions emerged from the Pension Protection Fund and increased its monthly payments to me, adding 2% - 3% to its consumption of my Lifetime Allowance. Good news, but this has caused my SIPP fund to breach the lifetime allowance by about 15K (SIPP assets value is about 38K, for context).
Given that I don't need the SIPP, I am intending leaving it as is and expressing my wish that my daughter or her child receives the SIPP on my death.

I understand that when I die the then excess over the lifetime allowance will first be taxed at 55%.
I also understand that, depending on whether I have reached my 75th birthday, the new owner of the SIPP will be able to take the money tax-free or at their marginal rate of tax.
If I have the above wrong, please tell.

What I know I don't understand is the nature of the thing that the new owner of the SIPP gets:
Is it a SIPP? If so, is it of some special type or in some special state?
Can the investments it contains be left to accumulate until the new owner's retirement?
Is the new owner required to be a certain age (55 or whatever it is at the relevant time) before taking the benefits?
Is it a SIPP that the new owner can contribute to?
Does it count against the new owner's lifetime allowance?
Is there anything else I should consider?

TIA, Jeff

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Re: SIPP Inheritance

#216335

Postby DrBunsenHoneydew » April 20th, 2019, 12:18 pm

JeffW55 wrote:Hi,
My wife and I have retired and have more than adequate income and savings for now and the future, including after my exit.
I have an additional SIPP that is still in the accumulation phase (all other 'pensions' are occupational pensions, state pension or annuities, from which I have been receiving income for a number of years).
Recently, one of my occupational pensions emerged from the Pension Protection Fund and increased its monthly payments to me, adding 2% - 3% to its consumption of my Lifetime Allowance. Good news, but this has caused my SIPP fund to breach the lifetime allowance by about 15K (SIPP assets value is about 38K, for context).
Given that I don't need the SIPP, I am intending leaving it as is and expressing my wish that my daughter or her child receives the SIPP on my death.

I understand that when I die the then excess over the lifetime allowance will first be taxed at 55%.
I also understand that, depending on whether I have reached my 75th birthday, the new owner of the SIPP will be able to take the money tax-free or at their marginal rate of tax.
If I have the above wrong, please tell.

What I know I don't understand is the nature of the thing that the new owner of the SIPP gets:
Is it a SIPP? If so, is it of some special type or in some special state?
Can the investments it contains be left to accumulate until the new owner's retirement?
Is the new owner required to be a certain age (55 or whatever it is at the relevant time) before taking the benefits?
Is it a SIPP that the new owner can contribute to?
Does it count against the new owner's lifetime allowance?
Is there anything else I should consider?

TIA, Jeff

Your understanding is correct in your middle paragraph queries.

The successor gets a "Successor Flex-Access Drawdown" pension plan established in their name, sometimes called a Dependant's Flexi-Acccess Drawdown. It is not a SIPP. If you had no dependants, you could nominate someone else and they get a Nominee Flex-Access Drawdown on the same terms. The successor or nominee can take an Annuity instead, the plan would not then cascade to their own successor.

As you say, the successor either gets tax-free payments (if you were under 75 and a claim is made within 2 years of death - a potential gotcha there!) or they get taxable payments (HMRC issues a Tax Code to the scheme like any other pension in payment). They do not have to take any payments if not wanted and yes it would roll up.
The successor cannot make any payments into the plan.
For the taxable on-or-after 75th birthday demise version, the successor cannot take a tax-free commencement lump sum or partially tax-free drawdown payments.
The dependant's pension does not count against their own Lifetime Allowance (because their LTA restricts value from pension contribution payments they make, which is nil for this plan).
The successor does not have to be any particular age.

If you want a headache you can read the HMRC Guide at https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm072400

JeffW55
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Re: SIPP Inheritance

#217000

Postby JeffW55 » April 24th, 2019, 2:31 pm

Thank you, Dr.
That's very clear (and I'm not talking about the HMRC Guide).
Jeff

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Re: SIPP Inheritance

#217014

Postby Dod101 » April 24th, 2019, 3:31 pm

Most of these will be free of IHT as well, since most fall under the pension rules such that the trustees who hold the SIPP have complete discretion as to where the proceeds will go. Normally they will take heed take of the Letter of Wishes and act accordingly. Every holder of a SIPP should check though.

Dod

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Re: SIPP Inheritance

#217180

Postby Bouleversee » April 25th, 2019, 10:32 am

Dr B.H. - Do the same rules apply if one has a (Group) Personal Pension in drawdown?

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Re: SIPP Inheritance

#217230

Postby DrBunsenHoneydew » April 25th, 2019, 12:49 pm

Bouleversee wrote:Dr B.H. - Do the same rules apply if one has a (Group) Personal Pension in drawdown?


I believe so because when the holder leaves employment these pension plans are generally made fully "personal".

Obv check with the plan manager for certainty though.

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Re: SIPP Inheritance

#219462

Postby JeffW55 » May 4th, 2019, 9:55 am

I have just had an awful thought (?). The lifetime allowance that I have exceeded is FIxed Protection 2014. I haven't made any contributions since before taking it out, but the emergence from PPF of my other pension has tipped my SIPP about 13K over the limit. Will I have lost my protection?
If so, is there any simple way of dropping below again (e.g. spending all day buying and selling an investment trust and losing the stamp duty each time)?. Actually, several days, probably, to lose 30% of 40K.

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Re: SIPP Inheritance

#219544

Postby TUK020 » May 4th, 2019, 4:32 pm

Wait for a market crash, and then crystallise the pension. LTA is only measured at the crystallisation event, I think. Needs checking

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Re: SIPP Inheritance

#219577

Postby Bouleversee » May 4th, 2019, 7:20 pm

Dr B-H

I thought I had thanked you for your earlier response to me but I can't see my post so please accept my apologies. Perhaps it went the same way as one I had almost finished an hour or so ago which vanished before my very eyes. I have no idea what key I pressed to make that happen.

I was just going to say that my question was just out of academic interest. We were not made aware of this when my late husband was trying to decide what to do with his Equitable Life drawdown in the with profits fund at the time of their debacle. He ended up buying a fixed rate annuity at quite a good rate (I have forgotten precisely what it was so must check) with a 2/3 spouse's benefit which may not have been the best thing to do but at least I know the payment will go into my bank every month and it doesn't cause me any work or angst. The other thing is that we won a claim against EL so the annuity was based on what the fund value was before putting it into the WP fund. I have no idea what happened to people's funds if they stayed with EL or moved the reduced funds to another provider so there's no point in speculating whether the family would have been better off at the end of the day. I will, however, make sure my children understand the options as regards their SIPPS which have not been going very long so are unlikely to exceed any limits. It may pay them to live off their ISAs and other investments and leave the SIPP untouched for heirs.

Is there anywhere this situation is summarised I could link them to? I always find the HMRC website rather impenetrable.

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Re: SIPP Inheritance

#219675

Postby DrBunsenHoneydew » May 5th, 2019, 3:33 pm

JeffW55 wrote:I have just had an awful thought (?). The lifetime allowance that I have exceeded is FIxed Protection 2014. I haven't made any contributions since before taking it out, but the emergence from PPF of my other pension has tipped my SIPP about 13K over the limit. Will I have lost my protection?
If so, is there any simple way of dropping below again (e.g. spending all day buying and selling an investment trust and losing the stamp duty each time)?. Actually, several days, probably, to lose 30% of 40K.


You don't lose the protection by simply exceeding the limit. It's only new contributions that matter.

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Re: SIPP Inheritance

#219678

Postby DrBunsenHoneydew » May 5th, 2019, 3:42 pm

Bouleversee wrote:Dr B-H

I thought I had thanked you for your earlier response to me but I can't see my post so please accept my apologies. Perhaps it went the same way as one I had almost finished an hour or so ago which vanished before my very eyes. I have no idea what key I pressed to make that happen.

I was just going to say that my question was just out of academic interest. We were not made aware of this when my late husband was trying to decide what to do with his Equitable Life drawdown in the with profits fund at the time of their debacle. He ended up buying a fixed rate annuity at quite a good rate (I have forgotten precisely what it was so must check) with a 2/3 spouse's benefit which may not have been the best thing to do but at least I know the payment will go into my bank every month and it doesn't cause me any work or angst. The other thing is that we won a claim against EL so the annuity was based on what the fund value was before putting it into the WP fund. I have no idea what happened to people's funds if they stayed with EL or moved the reduced funds to another provider so there's no point in speculating whether the family would have been better off at the end of the day. I will, however, make sure my children understand the options as regards their SIPPS which have not been going very long so are unlikely to exceed any limits. It may pay them to live off their ISAs and other investments and leave the SIPP untouched for heirs.

Is there anywhere this situation is summarised I could link them to? I always find the HMRC website rather impenetrable.


The best sites are those of Pension Companies themselves that are aimed at Financial Advisers,
e.g. Prudential
https://www.pruadviser.co.uk/knowledge- ... t%22%7D%5D
or Royal London
https://adviser.royallondon.com/technic ... ns-a-to-z/

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Re: SIPP Inheritance

#219697

Postby TedSwippet » May 5th, 2019, 7:06 pm

TUK020 wrote:Wait for a market crash, and then crystallise the pension. LTA is only measured at the crystallisation event, I think. Needs checking

That might be one way to limbo under the LTA, but it's very risky and uncertain.

The crash might not come when you need it. Or it might not be as deep as you need it to be. Or you might fail to call the bottom, Or it might only come after a further 30-40% run up in markets and so be of no use. Or you might hold a balanced and mixed stock/bond portfolio where bonds will protect you from a crash in stock prices causing a dip in your pension. Or ...

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Re: SIPP Inheritance

#224430

Postby Grandadrobert » May 25th, 2019, 10:26 pm

Hello. 1st time on here and this thread interested me as I am having difficulty in getting answers to what seem fairly obvious questions.
I read regularly about a final “testing” of BCE at age 75. What I cannot seem to find is what physically happens at that time. I will be over the Lifetime Allowance and plan to leave the uncrystallised funds to my children.
A) Will the funds have 55% or 25% taken out by HMRC at that time
Or B) is a calculation made at that time but nothing taken until my children access the funds.
If so,
C)When those funds are then accessed, how is that amount taken if it is a finite amount as opposed to a continual percentage taken until the fund is reduced to zero.
D) If the final “testing” is done at 75, how is any remaining growth (which could potentially be 20 years) taxed.

Any help greatly appreciated.

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Re: SIPP Inheritance

#224453

Postby Chrysalis » May 26th, 2019, 9:13 am

@grandadrobert.
I’m following your question with interest as I am likely to be in a similar situation. I’m not an expert, but reading through some of the links above suggests to me the following:

Crystallisation will happen at age 75 if you are still alive. At that point, I assume you will have to choose how to take benefits and how to pay the excess charge (ie as 55% on a lump sum or 25% on income). Here I get a bit hazy as I am not sure of the practicalities of paying the LTA charge. (Eg if you go into drawdown, you’ll receive 25% TFC on any remaining LTA percentage, but if you take no income will you avoid the LTA excess charge on income? Don’t know).

After age 75 there is no further BCE on death (based on info on the Pruadvisor website). So your beneficiaries will inherit the pot and, I assume, pay tax at their marginal income tax rate (but will they also pay the LTA excess charge on income? Don’t know).

If you die before age 75, the BCE happens on death and the LTA charge is levied when the beneficiaries take the benefits, I think. There is no other tax to pay as the beneficiaries can take lump sum or drawdown income tax free. There’s info on that on the pruadivsor website.

I’ll wait to here from others with more experience of this. Might be worth starting a new thread asking how the LTA excess charge is actually paid at age 75?

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Re: SIPP Inheritance

#224462

Postby Chrysalis » May 26th, 2019, 9:40 am

Ok I think I’ve answered one of my points. At age 75, if you don’t do anything, you will pay an immediate 25% charge on the excess above the LTA. The funds are now technically crystallised but you can still take some tax free cash later if you have enough LTA % to allow that. Regardless, on your death post age75, your beneficiaries will simply receive the benefits and pay tax at their income tax rate when they take the benefits. There is no further LTA charge or test on death.

You should check that your provider offers beneficiary drawdown, because there is no obligation for them to offer this option. Your beneficiaries could be forced to take a lump sum or an annuity, which might not suit their needs.

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Re: SIPP Inheritance

#224528

Postby Grandadrobert » May 26th, 2019, 2:51 pm

Thanks Jabd2001,
I am glad it is not just me having problems trying to understand the complexities.
I simply cannot find a clear answer to the questions, just references to “testing”.
If there is a final BCE “test” at 75, I am not grasping why my children (beneficiaries) are “tested” again when they take the funds as this will now no longer be classed as a crystallisation event.
The Pension Advisory Service were useless in answering the questions. In fact they were very arrogant. Saying that whether I liked it or not I had to take a lump sum or income at 75 which is simply not true.
HMRC were actually a lot more helpful and even though the person I spoke to was unable initially to answer my query, he did put me on hold and came back with the advice that the 75yr “test” would result in a 25% charge on the fund if the fund was carrying on at that time with the intention of passing it on.
I am not sure why they view it as 25% as opposed to 50% so have asked him to confirm it in writing and I will let you know how I get on.

I suspect that as more people start to get hit by the charges we will be able to access more information but at the moment it is very difficult to get clear advice.

Many thanks for your comments and I will keep you updated if I get more information

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Re: SIPP Inheritance

#224535

Postby DrBunsenHoneydew » May 26th, 2019, 3:57 pm

Grandadrobert wrote:Thanks Jabd2001,
I am glad it is not just me having problems trying to understand the complexities.
I simply cannot find a clear answer to the questions, just references to “testing”.
If there is a final BCE “test” at 75, I am not grasping why my children (beneficiaries) are “tested” again when they take the funds as this will now no longer be classed as a crystallisation event.
The Pension Advisory Service were useless in answering the questions. In fact they were very arrogant. Saying that whether I liked it or not I had to take a lump sum or income at 75 which is simply not true.
HMRC were actually a lot more helpful and even though the person I spoke to was unable initially to answer my query, he did put me on hold and came back with the advice that the 75yr “test” would result in a 25% charge on the fund if the fund was carrying on at that time with the intention of passing it on.
I am not sure why they view it as 25% as opposed to 50% so have asked him to confirm it in writing and I will let you know how I get on.

I suspect that as more people start to get hit by the charges we will be able to access more information but at the moment it is very difficult to get clear advice.

Many thanks for your comments and I will keep you updated if I get more information


The beneficiary is not tested on death after age 75 - not sure why you say they would be.

The excess charge at age 75 is 25% because the remaining excess will always be subject to further tax (either the pensioner pays income tax if they draw it as a lump sum or an ongoing drawdown pension, or the inheriting beneficiary will pay income tax on what they get, or if it were put into a discretionary trust there would be a 45% Trust commencement charge. This charge can be used as a tax credit by the ultimate beneficiary of the trust assets to offset their own income tax liability).

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Re: SIPP Inheritance

#224537

Postby Grandadrobert » May 26th, 2019, 4:22 pm

Thank you that helps a lot.
Can I also ask.
If there is a “final” testing at 75, presumably the fund value (in excess of the Lifetime Allowance) would be reduced by 25% (the charge). Hopefully there would have been significant further growth until ultimately it is passed on after death.
Are the funds then treated as straightforward investment where my sons would pay income tax at their marginal rate on any withdrawals or are the funds treated as a pension and subject to the beneficiaries own Lifetime Allowance (which seems like double taxation).

This is also the first time I have heard of the possibility of tax credits in the scenario and I wonder if you could explain further.

Many thanks,
You have explained more in one post that an entire conversation with the Pension Advisory Service!! Much appreciated

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Re: SIPP Inheritance

#224548

Postby DrBunsenHoneydew » May 26th, 2019, 5:03 pm

Grandadrobert wrote:Thank you that helps a lot.
Can I also ask.
If there is a “final” testing at 75, presumably the fund value (in excess of the Lifetime Allowance) would be reduced by 25% (the charge). Hopefully there would have been significant further growth until ultimately it is passed on after death.
Are the funds then treated as straightforward investment where my sons would pay income tax at their marginal rate on any withdrawals or are the funds treated as a pension and subject to the beneficiaries own Lifetime Allowance (which seems like double taxation).

This is also the first time I have heard of the possibility of tax credits in the scenario and I wonder if you could explain further.

Many thanks,
You have explained more in one post that an entire conversation with the Pension Advisory Service!! Much appreciated


It is not really a "final testing" at 75. It is a test in case no future test before death is done. If the holder decided to crystallise at age 80, the 75 Test would be "unwound" and a new test at 80 done instead.

It is treated as a taxable-at-source pension income stream (so PAYE systems and an appropriate secondary Tax Code will be used, such as Basic Rate or 40% on all payments, depending on their other income sources).

There is no double taxation of that LTA sort. The beneficiary's pension does not count against their own Lifetime Allowance (because the purpose of the LTA test is to restrict the draw-out value from pension contribution payments they themselves make, which are nil for this plan).

The "tax credits" are so that a trust beneficiary (who would normally pay income tax on receipts from a trust), can avoid this tax as the 45% trust establishment tax has already covered the highest rate of income tax they could pay.

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Re: SIPP Inheritance

#224552

Postby Grandadrobert » May 26th, 2019, 5:19 pm

Thank you very much.
That has made it all much clearer.
I appreciate the time taken to answer the questions.


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