Pensions and inheritance

[SMS1606]

Currently I am drawing an amount from my SIPP (which is in drawdown) equal to my personal allowance and therefore effectively tax free. Eventually when I get to 65 I have a final salary pension starting and sometime, a bit later, the state pension. My plan is thereafter to leave my SIPP untouched, to accumulate, so it can be transfered to my sons on my death. Assuming I die after the age 75 they will pay tax on it as they draw it (as I would have done).

However my question is; can they take a 25% tax free lump sum? (When I put the SIPP into drawdown I took the 25% tax free lump sum).

If not, surely I'm better to gradually draw down the pension, after 65, paying the tax and giving it to them so they can contribute it to their own SIPP, recovering the tax in the process? That would allow them to at least be able to tax a 25% tax free lum sum when they retire.

Yes, I'm aware of the 7 year IHT rule and exemptions.

[Urbandreamer]

However my question is; can they take a 25% tax free lump sum? (When I put the SIPP into drawdown I took the 25% tax free lump sum).

If not, surely I'm better to gradually draw down the pension, after 65, paying the tax and giving it to them so they can contribute it to their own SIPP, recovering the tax in the process? That would allow them to at least be able to tax a 25% tax free lum sum when they retire.

Yes, I'm aware of the 7 year IHT rule and exemptions.

Ok, as I understand it, you can take that 25%, also known by HMRC as PCLS (Pension commencement lump sum) or others as "tax free lump sum".
However make it VERY clear that is what you are doing to your pension provider, as this is now something less common.

Re, the rest. It depends upon the age or circumstances of yourself and your children. Of course the aspect of if you plan to die before 75 comes into it as well. Then again there is the question of the size of your estate.

We don't know these things, so can't comment.

I'm currently 60, and have given up work. IHT is a minor issue, as in the costs of accounting make it an issue. Currently living of my ISA's, but I will start drawing upon SIPP's and other DC schemes etc, as needed.

PS,I would really LOVE HMRC to deal with parents or grandparents who directly contributed to a child's pension in the 7 years before their death. YES people CAN contribute to a child's pension from birth. I suspect that the media would have a field day.

[ursaminortaur]

Currently I am drawing an amount from my SIPP (which is in drawdown) equal to my personal allowance and therefore effectively tax free. Eventually when I get to 65 I have a final salary pension starting and sometime, a bit later, the state pension. My plan is thereafter to leave my SIPP untouched, to accumulate, so it can be transfered to my sons on my death. Assuming I die after the age 75 they will pay tax on it as they draw it (as I would have done).

However my question is; can they take a 25% tax free lump sum? (When I put the SIPP into drawdown I took the 25% tax free lump sum).

If not, surely I'm better to gradually draw down the pension, after 65, paying the tax and giving it to them so they can contribute it to their own SIPP, recovering the tax in the process? That would allow them to at least be able to tax a 25% tax free lum sum when they retire.

Yes, I'm aware of the 7 year IHT rule and exemptions.

No, they won't be able to get 25% tax free.

Taxed income from a pension is income hence you could make regular gifts out of surplus income which immediately bypass IHT rather than out of capital which is subject to the seven year rule.

https://www.gabyhardwicke.co.uk/briefing-notes/inheritance-tax-exemption-for-gifts-out-of-surplus-income/

[Dod101]

Currently I am drawing an amount from my SIPP (which is in drawdown) equal to my personal allowance and therefore effectively tax free. Eventually when I get to 65 I have a final salary pension starting and sometime, a bit later, the state pension. My plan is thereafter to leave my SIPP untouched, to accumulate, so it can be transfered to my sons on my death. Assuming I die after the age 75 they will pay tax on it as they draw it (as I would have done).

However my question is; can they take a 25% tax free lump sum? (When I put the SIPP into drawdown I took the 25% tax free lump sum).

If not, surely I'm better to gradually draw down the pension, after 65, paying the tax and giving it to them so they can contribute it to their own SIPP, recovering the tax in the process? That would allow them to at least be able to tax a 25% tax free lum sum when they retire.

Yes, I'm aware of the 7 year IHT rule and exemptions.

No, they won't be able to get 25% tax free.

Taxed income from a pension is income hence you could make regular gifts out of surplus income which immediately bypass IHT rather than out of capital which is subject to the seven year rule.

https://www.gabyhardwicke.co.uk/briefing-notes/inheritance-tax-exemption-for-gifts-out-of-surplus-income/

I think I know what ursaminortaur means but it does not read quite right. Obviously, the sons will not be able to take 25% of their father's SIPP tax free after they inherit the SIPP, but what the father is proposing as an alternative is make regular gifts out of income to the sons. They can do what they like with it and subject to their own tax position it may be efficient for them to top up their own SIPPs.

If father dies before 75 though, they can draw down the entire inherited SIPP tax free

Dod

[ursaminortaur]

No, they won't be able to get 25% tax free.

Taxed income from a pension is income hence you could make regular gifts out of surplus income which immediately bypass IHT rather than out of capital which is subject to the seven year rule.

https://www.gabyhardwicke.co.uk/briefing-notes/inheritance-tax-exemption-for-gifts-out-of-surplus-income/

I think I know what ursaminortaur means but it does not read quite right. Obviously, the sons will not be able to take 25% of their father's SIPP tax free after they inherit the SIPP, but what the father is proposing as an alternative is make regular gifts out of income to the sons. They can do what they like with it and subject to their own tax position it may be efficient for them to top up their own SIPPs.

If father dies before 75 though, they can draw down the entire inherited SIPP tax free

Dod

I was just pointing out the surplus income option since he had only explicitly mentioned the seven year rule and so I wasn't sure if he was aware of it.

[SMS1606]

I think I know what ursaminortaur means but it does not read quite right. Obviously, the sons will not be able to take 25% of their father's SIPP tax free after they inherit the SIPP, but what the father is proposing as an alternative is make regular gifts out of income to the sons. They can do what they like with it and subject to their own tax position it may be efficient for them to top up their own SIPPs.

If father dies before 75 though, they can draw down the entire inherited SIPP tax free

Dod

I was just pointing out the surplus income option since he had only explicitly mentioned the seven year rule and so I wasn't sure if he was aware of it.

Yes, I was, cheers