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Do SIPPS include free life insurance?

Bouleversee
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Do SIPPS include free life insurance?

#276550

Postby Bouleversee » January 10th, 2020, 8:17 pm

There was a recent question in The Times Money section from a couple who were preparing for retirement and had various pots of money, the largest of which was a SIPP and wanted advice on how best to secure an income of £3000 a month. The advice Baroness Altmann gave them was to use the various pots before touching the SIPP because "Keeping his pension untouched provides them with tax-free returns and life insurance". I have never had a SIPP but my children do and they don't seem to be aware of any life insurance being included, which is indeed a consideration. I know that final salary schemes include life insurance until retirement but wasn't aware that SIPPs did and clearly my kids don't know that either. Can anyone clarify, please?

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Re: Do SIPPS include free life insurance?

#276559

Postby JohnB » January 10th, 2020, 8:48 pm

And the SIPP can be transferred free of inheritance tax

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Re: Do SIPPS include free life insurance?

#276563

Postby Bouleversee » January 10th, 2020, 8:55 pm

Snorvey wrote:Return of fund on death is probably what it means.


I should hope so but that's not really life insurance, is it? The estate gets that with any investment/savings including ISAs which (too late for me) now don't attract any tax on income/growth during the period from death to distribution after probate so far as I can gather.

John B. said:

"And the SIPP can be transferred free of inheritance tax"

Yes, that's a bone of contention with me as I have a large sum in ISAs arising from contributions on which I had already paid tax and they will be clobbered by IHT when I die. Perhaps that's what she was referring to but it's more of a tax concession than life insurance.

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Re: Do SIPPS include free life insurance?

#276566

Postby Dod101 » January 10th, 2020, 9:20 pm

I suspect that she was confusing a SIPP with most pension schemes run by companies which usually include life insurance. There is no life insurance automatically associated with a SIPP.

Furthermore I am told that not all SIPPs are free from IHT. It is the case with most SIPPs though but the test is whether the SIPP managers/trustees have discretion about where to pay the proceeds in the event of death. If they do then the assets are held in trust and are thus outside of the estate for IHT purposes.

Dod

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Re: Do SIPPS include free life insurance?

#276599

Postby mc2fool » January 10th, 2020, 11:44 pm

Dod101 wrote:Furthermore I am told that not all SIPPs are free from IHT. It is the case with most SIPPs though but the test is whether the SIPP managers/trustees have discretion about where to pay the proceeds in the event of death. If they do then the assets are held in trust and are thus outside of the estate for IHT purposes.

Hmm...can you expand on that and/or provide a link to an explanation, please?

I gave no instructions to my SIPP provider as to what to do on my popping my clogs, I just left that section of the form for opening the a/c blank, figuring it'd be dealt with in my will (which, the awful procrastinator I am, I still have to write....). So where does that leave me in regards to IHT?

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Re: Do SIPPS include free life insurance?

#276600

Postby Bouleversee » January 11th, 2020, 12:07 am

Dod101 wrote:I suspect that she was confusing a SIPP with most pension schemes run by companies which usually include life insurance. There is no life insurance automatically associated with a SIPP.

Furthermore I am told that not all SIPPs are free from IHT. It is the case with most SIPPs though but the test is whether the SIPP managers/trustees have discretion about where to pay the proceeds in the event of death. If they do then the assets are held in trust and are thus outside of the estate for IHT purposes.

Dod


Thanks, Dod. I am amazed that Baroness Altmann of all people would get that wrong.

That's an interesting point you make re IHT which I was unaware of. My children's SIPPS are with Interactive Investor. I wonder what they put on their forms and whether the SIPP Managers have such discretion. I'm pretty sure they will have made wills years ago, long before they had SIPPS, probably leaving everything to their spouses which wouldn't attract IHT anyway on the first death but presumably would on the 2nd. Something to look into.

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Re: Do SIPPS include free life insurance?

#276604

Postby PinkDalek » January 11th, 2020, 12:45 am

mc2fool wrote:Hmm...can you expand on that and/or provide a link to an explanation, please?

I gave no instructions to my SIPP provider as to what to do on my popping my clogs, I just left that section of the form for opening the a/c blank, figuring it'd be dealt with in my will (which, the awful procrastinator I am, I still have to write....). So where does that leave me in regards to IHT?


I'm sure Dod will explain further but it is usual to consider filling in an Expression of Wish (random example below) which the trustees or scheme administrators may follow in their absolute discretion.

https://www.oldmutualwealth.co.uk/globalassets/documents/literature-library/platform/collective-retirement-account/pdf4161-214-1591-expression-of-wish.pdf

Your SIPP provider should have a similar form available.

More here https://www.pensionsadvisoryservice.org.uk/content/publications-files/uploads/Death_and_taxes_SPOT024_v1.1.pdf (albeit out of date) which is worth a read and see the part about What if there is no “expression of wish”? and Wills etc.

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Re: Do SIPPS include free life insurance?

#276620

Postby Dod101 » January 11th, 2020, 8:34 am

I have recently gone through this chapter and verse. Most SIPPs are under the pension rules and the assets are thus held by the managers as Trustees, giving them discretion as to where to pay the proceeds on death. That is why you are encouraged to give them a Letter of Wishes, and cannot give them an instruction. They can still ignore your wishes if they deem it appropriate but in practice hardly ever will. If your SIPP is arranged in this way, to answer Mcfool's point, instructions under a Will as such are of no effect as the executors of the Will have no say as the assets are outside of the estate (hence the freedom from IHT; you cannot have it both ways)

The Pension Advisory Service says that if there is no Expression of Wishes the SIPP trustees will probably follow the Will, but my understanding is that they will take the Will as guidance as to what they should do; it cannot be an instruction.

I have seen the before/after 75 situation in action. A friend of mine whose husband died before 75 got the entire proceeds of the SIPP tax free and can do what she likes with it, draw an income, use it to pay off the mortgage or whatever. She can in turn I think leave it to her off spring and the same rules apply to them. Death after 75 is much more complicated but the most tax efficient way is for the beneficiary to take a drawdown.

Dod
Last edited by Dod101 on January 11th, 2020, 8:45 am, edited 1 time in total.

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Re: Do SIPPS include free life insurance?

#276665

Postby Chrysalis » January 11th, 2020, 11:15 am

Dod is spot on. Most pensions have trustees and the allocation after death is discretionary, and outside of the estate. One exception to this is Nest, the government sponsored provider which is used by many small organisations under auto-enrolment.

Also, a nuance about further inheritance. The tax treatment depends on whether the immediately preceding owner is over or under 75 at death. Thus, if in Dod’s example the widow dies over the age of 75 and leaves money in the inherited pot, it will be subject to taxation on the beneficiaries. Conversely if a beneficiary inherits a taxable pot (the deceased being over 75) and the beneficiary dies under 75, then is becomes tax free again.

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Re: Do SIPPS include free life insurance?

#276674

Postby Dod101 » January 11th, 2020, 11:44 am

Chrysalis wrote:Dod is spot on. Most pensions have trustees and the allocation after death is discretionary, and outside of the estate. One exception to this is Nest, the government sponsored provider which is used by many small organisations under auto-enrolment.

Also, a nuance about further inheritance. The tax treatment depends on whether the immediately preceding owner is over or under 75 at death. Thus, if in Dod’s example the widow dies over the age of 75 and leaves money in the inherited pot, it will be subject to taxation on the beneficiaries. Conversely if a beneficiary inherits a taxable pot (the deceased being over 75) and the beneficiary dies under 75, then is becomes tax free again.


My understanding is that if the second generation inherits the SIPP irrespective of when, in my example, the widow dies (over or under 75) the second generation beneficiaries can take the proceeds as a drawdown pension subject only to their tax position; the pot itself remains intact unless they want to take it as a lump sum to pay off a mortgage or something, when they will be charged tax at 45% on the lump sum.

The rules are though very complicated but the essence is that if the beneficiary treats the lump sum in the SIPP as a pension they are taxed at their marginal rate; if they treat it as a lump sum to be spent on a holiday or paying off a mortgage or whatever then they will be charged at a penal tax rate (at least I would call a 45% tax charge penal)

Dod

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Re: Do SIPPS include free life insurance?

#276692

Postby mc2fool » January 11th, 2020, 1:12 pm

Thanks for the comments. Gad, I knew that this aspect of my SIPP was something I needed to look into, but it sounds even more complex than I'd thought....

Part of my reason (aside from general inertia when it comes to such things!) for my procrastination on this, along with preparing a will, is that, should I be hit by the proverbial bus tomorrow, the intestacy rules are ok by me. I have no wife, partner or kids, just a 97 year old mum and a younger brother, who has a couple of kids, and the whole lot (I thought SIPP included?) would go to the first surviving of those, which would be ok.

Having said that, while in making a will I'd make my brother my primary beneficiary I would also like to leave a fair chunk to charity ... although I haven't decided which one(s) yet, which is (yet) another reason for (and/or part of!) the procrastination.

In regards to my SIPP itself, it's currently around £250K and I'm just on 65, so unlikely to reach the LTA anytime soon. My plan - I am hoping at least - to never have to take anything out of the SIPP, as I believe I'll have enough other means to make it through without it (needing to go into care for an extended period may change that). Maybe the chunks left to charity should come out of the SIPP?

It all sounds like I have to decide if I'm going to die before or after 75 in order to figure out what best to do with it ... ?!?

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Re: Do SIPPS include free life insurance?

#276696

Postby Chrysalis » January 11th, 2020, 1:25 pm

Dod101 wrote:
Chrysalis wrote:Dod is spot on. Most pensions have trustees and the allocation after death is discretionary, and outside of the estate. One exception to this is Nest, the government sponsored provider which is used by many small organisations under auto-enrolment.

Also, a nuance about further inheritance. The tax treatment depends on whether the immediately preceding owner is over or under 75 at death. Thus, if in Dod’s example the widow dies over the age of 75 and leaves money in the inherited pot, it will be subject to taxation on the beneficiaries. Conversely if a beneficiary inherits a taxable pot (the deceased being over 75) and the beneficiary dies under 75, then is becomes tax free again.


My understanding is that if the second generation inherits the SIPP irrespective of when, in my example, the widow dies (over or under 75) the second generation beneficiaries can take the proceeds as a drawdown pension subject only to their tax position; the pot itself remains intact unless they want to take it as a lump sum to pay off a mortgage or something, when they will be charged tax at 45% on the lump sum.

The rules are though very complicated but the essence is that if the beneficiary treats the lump sum in the SIPP as a pension they are taxed at their marginal rate; if they treat it as a lump sum to be spent on a holiday or paying off a mortgage or whatever then they will be charged at a penal tax rate (at least I would call a 45% tax charge penal)

Dod


I don’t think that’s quite right. A successor (beneficiary of a beneficiary) who inherits a pension pot is taxed in the same way as the beneficiary. If the person leaving the pension pot (the donor let’s say) is under 75, no tax at all. So if your widow dies under 75 her beneficiary can take anything left in the pot completely tax free. If over 75, the beneficiary/successor pays tax on any withdrawals at their marginal tax rate - whether they take it as drawdown or as a lump sum. Clearly a large withdrawal could be subject to 45% tax, but it’s not a flat rate, its income tax rates. So the over/under 75 rule applies to successors as well as original beneficiaries (the point I was trying to make) and the tax rate, if applicable, is the beneficiary’s income tax rate.

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Re: Do SIPPS include free life insurance?

#276697

Postby swill453 » January 11th, 2020, 1:27 pm

I think you're overcomplicating it. It would be 5 minutes effort to do an expression of wish to make it pass to your mother, brother or both. If one of them was to die before you and you didn't update the expression, I think you could be pretty sure the trustees would pass it all to the other one.

Scott.

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Re: Do SIPPS include free life insurance?

#276698

Postby Chrysalis » January 11th, 2020, 1:31 pm

mc2fool wrote:Thanks for the comments. Gad, I knew that this aspect of my SIPP was something I needed to look into, but it sounds even more complex than I'd thought....

Part of my reason (aside from general inertia when it comes to such things!) for my procrastination on this, along with preparing a will, is that, should I be hit by the proverbial bus tomorrow, the intestacy rules are ok by me. I have no wife, partner or kids, just a 97 year old mum and a younger brother, who has a couple of kids, and the whole lot (I thought SIPP included?) would go to the first surviving of those, which would be ok.

Having said that, while in making a will I'd make my brother my primary beneficiary I would also like to leave a fair chunk to charity ... although I haven't decided which one(s) yet, which is (yet) another reason for (and/or part of!) the procrastination.

In regards to my SIPP itself, it's currently around £250K and I'm just on 65, so unlikely to reach the LTA anytime soon. My plan - I am hoping at least - to never have to take anything out of the SIPP, as I believe I'll have enough other means to make it through without it (needing to go into care for an extended period may change that). Maybe the chunks left to charity should come out of the SIPP?

It all sounds like I have to decide if I'm going to die before or after 75 in order to figure out what best to do with it ... ?!?


It’s not really a big deal to nominate beneficiaries. You can make it whoever you like, more than one beneficiary in different proportions if you like, change it whenever you like, and can nominate charities (who will receive it tax free whatever, I believe). Just do it, and worry about it being the right thing later and change if you need to. If you were to die tomorrow it would be up to the SIPP trustees to decide who to give it to. They might choose your 97 year old mother which might just mean that it all gets taxed at 40% eventually anyway!

Also, if you don’t crystallise it before 75, you lose the 25% tax free cash. I have a similar sized SIPP which is also likely not needed by me or immediate family. I have nominated my brother, but will likely crystallise and withdraw the 25% when I am 74 (assuming current rules) and give that away.

As far as intestacy goes, I think your other assets would all go to your mother, check here: https://www.gov.uk/inherits-someone-dies-without-will . Again, that doesn’t sound optimal or tax efficient. You could always make a simple will leaving all to your brother, or the residual after setting aside a sum for charity, with an accompanying side letter to instruct about any charitable donations you’d like to make. It’s worth having something that is ok put in place (after all you’ll be dead so won’t be too worried about the outcome), you can make it optimal later on at a point when it might be more likely to be actually used.
Last edited by Chrysalis on January 11th, 2020, 1:40 pm, edited 1 time in total.

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Re: Do SIPPS include free life insurance?

#276701

Postby mc2fool » January 11th, 2020, 1:40 pm

Chrysalis wrote:
mc2fool wrote:Part of my reason (aside from general inertia when it comes to such things!) for my procrastination on this, along with preparing a will, is that, should I be hit by the proverbial bus tomorrow, the intestacy rules are ok by me. I have no wife, partner or kids, just a 97 year old mum and a younger brother, who has a couple of kids, and the whole lot (I thought SIPP included?) would go to the first surviving of those, which would be ok.

As far as intestacy goes, I think your other assets would all go to your mother, check here: https://www.gov.uk/inherits-someone-dies-without-will . Again, that doesn’t sound optimal or tax efficient.

I had checked there, hence my "would go to the first surviving" comment, but I take your point that with a will I could ensure skipping mum, should she outlive me, and going direct to my brother, and hence avoiding potentially two IHT bites to get to him.

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Re: Do SIPPS include free life insurance?

#276704

Postby mc2fool » January 11th, 2020, 1:50 pm

Chrysalis wrote:Also, if you don’t crystallise it before 75, you lose the 25% tax free cash. I have a similar sized SIPP which is also likely not needed by me or immediate family. I have nominated my brother, but will likely crystallise and withdraw the 25% when I am 74 (assuming current rules) and give that away.

That's an interesting thought, but isn't it limited to £3K with anything above becoming liable for IHT if you pop your clogs before 81 (74+7) anyway? And if you're giving it to charity isn't it free of all tax anyway, whether it comes from your SIPP tax free pre 75 or post 75 anyway?....

Gad, I'm beginning to suspect the need for a will writing solicitor with IHT and SIPP knowledge.....anyone got any recommendations?

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Re: Do SIPPS include free life insurance?

#276709

Postby Chrysalis » January 11th, 2020, 2:01 pm

mc2fool wrote:
Chrysalis wrote:Also, if you don’t crystallise it before 75, you lose the 25% tax free cash. I have a similar sized SIPP which is also likely not needed by me or immediate family. I have nominated my brother, but will likely crystallise and withdraw the 25% when I am 74 (assuming current rules) and give that away.

That's an interesting thought, but isn't it limited to £3K with anything above becoming liable for IHT if you pop your clogs before 81 (74+7) anyway? And if you're giving it to charity isn't it free of all tax anyway, whether it comes from your SIPP tax free pre 75 or post 75 anyway?....

Gad, I'm beginning to suspect the need for a will writing solicitor with IHT and SIPP knowledge.....anyone got any recommendations?


You’re right, and I haven’t given much thought to what I will or won’t do with the lump sum in 20 years time, if I’m still here. I don’t think it makes a lot of difference financially, as you’ve pointed out, but I might like to give to the charities while I am still alive. Or to others if I prefer. It’s too far off to worry about, but I had thought I’d take it rather than lose it. I could always spend it, now there’s a thought!

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Re: Do SIPPS include free life insurance?

#276711

Postby Chrysalis » January 11th, 2020, 2:03 pm

Snorvey wrote:Also, if you don’t crystallise it before 75, you lose the 25% tax free cash.

Are you sure about that?


Sorry, my mistake, I meant if you don’t crystallise before death, you lose the tax free cash (or your beneficiaries do). The 75 was a decision I made in my head because if you die before then the beneficiaries get it all tax free anyway. And it’s the point at which LTA testing happens if not before. (It IS bloody complicated!)

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Re: Do SIPPS include free life insurance?

#276719

Postby mc2fool » January 11th, 2020, 2:44 pm

mc2fool wrote:Gad, I'm beginning to suspect the need for a will writing solicitor with IHT and SIPP knowledge.....anyone got any recommendations?

On that matter, a quick google got me to a page on MSE which has a link to "a free 30-60 minute session with a local independent financial adviser to discuss your inheritance plans" at https://offers.vouchedfor.co.uk/free-iht-check/money-saving-expert.

Anyone used this?

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Re: Do SIPPS include free life insurance?

#276721

Postby Dod101 » January 11th, 2020, 2:58 pm

Chrysalis wrote:I don’t think that’s quite right. A successor (beneficiary of a beneficiary) who inherits a pension pot is taxed in the same way as the beneficiary. If the person leaving the pension pot (the donor let’s say) is under 75, no tax at all. So if your widow dies under 75 her beneficiary can take anything left in the pot completely tax free. If over 75, the beneficiary/successor pays tax on any withdrawals at their marginal tax rate - whether they take it as drawdown or as a lump sum. Clearly a large withdrawal could be subject to 45% tax, but it’s not a flat rate, its income tax rates. So the over/under 75 rule applies to successors as well as original beneficiaries (the point I was trying to make) and the tax rate, if applicable, is the beneficiary’s income tax rate.


I thought I had responded but it seems my reply has got lost somewhere. Does that mean that the tax comments in the Pension Advisory bumph has now been implemented? That instead of taxing at 45% it is now at the beneficiary's marginal tax rate?

I am very happy to be corrected because I have never really looked as far as the next generation down.

Dod


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