SIPP and approaching 75

[Steveam]

I hope this is useful to those approaching 75 with a SIPP. It is from AJB to a friend who knows I’m following close behind


_____________________________________________________________________________
I note from our records that you will reach your 75th birthday shortly. This represents a key milestone in your pension scheme, after which some of the rules regarding your pension benefits will change. There are a few issues that I would like to bring to your attention in advance of this.

No Requirement to Secure an Income

Pension scheme members are no longer required to secure an income from their pension funds by their 75th birthday (for example by buying an annuity). Instead, you can defer taking pension benefits beyond age 75, meaning that you could choose to leave your fund unvested for as long as you want to. In addition, it is important to note that the right to take a Pension Commencement Lump Sum (i.e., your tax-free lump sum) is extended beyond the age of 75.

Lifetime Allowance Test

Whether you have started drawing benefits or not, your whole scheme will be subject to a Benefit Crystallisation Event (BCE) on your 75th birthday. In other words, your benefits will be tested against the lifetime allowance. The test will cover the growth in value of any drawdown funds that first came into payment after 6 April 2006 plus the full value of any unvested funds.

Further to the rule changes announced in the Spring Budget on 15 March 2023, no lifetime allowance tax charge can arise on BCEs falling in the 2023/24 tax year. However, the lifetime allowance used by the growth in drawdown funds is relevant when calculating the value of any Pension Commencement Lump Sum you take after your 75th birthday either from your SIPP or from another pension scheme.

If you have any type of lifetime allowance protection (for example enhanced, primary, fixed, or individual) please send us a copy of your certificate if you have not already.

In order to complete the lifetime allowance test we are required to value your fund.

We will write to you again shortly after your 75th birthday to confirm if any lifetime allowance has been used. After age 75, your pension benefits will not be subject to any further BCEs. The government also announced in the Spring Budget it intends to remove the lifetime allowance completely in April 2024.

Death Benefits

Death benefits payable to dependants and beneficiaries on your death after age 75 will usually be subject to income tax, regardless of whether your funds were vested or not. The death benefits from your pension will not be subject to Inheritance Tax. You should have previously nominated beneficiaries in relation the distribution of death benefits from your scheme, and I would like to remind you of the importance of keeping your nomination up to date. This is particularly relevant given the rule changes applicable after your 75th birthday.

Contributions

Any member contributions made after the age of 75 are not eligible for tax relief. As we do not accept non-tax-relievable pension contributions, I would like to remind you that we will not accept any member contributions (whether paid by you or someone else) after your 75th birthday. Employer contributions are still permissible and will be subject to the annual allowance as normal.

I hope that the above is clear. If you have any questions or require any additional information, please contact us on the details above. Alternatively, please speak to your financial adviser.

Yours sincerely
_____________________________________________________________________________


Should Labour win the next election they have said they will reintroduce the LTA charge or some such.

Best wishes,

Steve

[bluedonkey]

Any more information on the income tax payable by beneficiaries on SIPP owner's death after 75?

[Dod101]

Any more information on the income tax payable by beneficiaries on SIPP owner's death after 75?

I have always understood that if the beneficiaries want to draw an income from an inherited SIPP the tax charge will be at their marginal rate.

Thanks to Steveam for that quote. I think it sets out the position very clearly.

Dod

[kiloran]

I recently received a similar message from Hargreaves Lansdowne as I'm nearing 75. I've copied it here as it provides another view of the situation. The reference to the PensionWise service may be of interest.

Dear Mr Kiloran

Your selected retirement date is approaching

We wrote to you a few months ago to help you with your retirement options. Your selected retirement date is approaching. The date is flexible and you can change it. However if you do intend to take benefits from your pension shortly there are some important decisions to make.

Your options

You normally have the option of taking up to 25% of your SIPP fund tax free. This is yours to spend or save as you wish. You then choose how to use the remainder to provide a taxable income or, potentially, a taxable cash sum. Please remember tax and pension rules can change and benefits will depend on your circumstances. Details of your options, and how you can get more information about them, are included in this message.

The government provides a free and impartial service to help you understand your retirement options and we recommend you use this. Pension Wise appointments are available over the phone or face to face. Please visit http://www.pensionwise.gov.uk, or call 0800 138 3944 for details.

What you do with your pension is an important decision. We strongly recommend you understand your options and check your chosen option is right for your circumstances. Take advice or guidance if you are unsure. This message is not personal advice. We offer a range of information to help you plan your own finances and personal financial advice if requested.

We offer all of the main options – drawdown, lump sums and a whole of market annuity shopping around service. You can use our information and support to make your own decisions, or choose our advice service if you need more help. Alternatively, you can shop around and choose a different provider or adviser - MoneyHelper has a directory. There's no requirement to access your pension at any point, you can simply leave it invested until a later date if you choose. If you would like to talk to us about your options, please call us on 0117 980 9940.

Your SIPP value

Your SIPP value on the date above is shown below:

HL SIPP £xxxxxxxxx

The value of your SIPP is not guaranteed and will rise and fall depending on the underlying investments. You can view the latest value using the “Go” button at the top of this screen, or by calling us.

Option 1: A secure income for life - an annuity

An annuity is the only way to convert your pension into a guaranteed income for life. You can choose from a number of different options such as an income linked to inflation or an income for your spouse or partner when you die.

If you or your partner smoke or have any medical conditions you may be able to obtain a higher income. You do not have to be ill to qualify – minor conditions such as high blood pressure can result in a better income, as can a more serious illness for which you have now been given the all clear. Even confirming simple details about your height, weight and alcohol intake could give you an enhanced rate. Most of our clients qualified for an enhanced rate last year. You just need to confirm these details when you request quotes.

Once you set up your annuity, you normally can’t change or cancel it, so it’s important to choose your options carefully.

Option 2: Drawdown - control and flexibility, but higher risk

Another option is drawdown. With drawdown you can keep your pension invested and take a flexible income directly from the fund.

If you choose drawdown, you must be prepared to accept risk with your retirement income. Unlike an annuity, your income is not secure and could fall or rise in the future. Your pension could run out if you take too much out, live longer than expected or make poor investment decisions. We strongly suggest you seek personal advice if you are at all uncertain about its suitability for your circumstances.

Option 3: A lump sum, directly from your pension (UFPLS)

You can take lump sums directly from your pension, without taking an annuity or moving into drawdown. This is known as an Uncrystallised Funds Pension Lump Sum (UFPLS) and is available to investors who have not yet taken tax-free cash or income from part of their fund.

Like drawdown, this option allows you to take lump sums from your pension, which remains invested. However, you don’t take the tax-free lump sum up front. Instead, usually 25% of each lump sum is tax-free. Income is not secure so it’s a higher risk option than an annuity.

Mix and match

You don’t have to choose just one option for your entire fund. For example you could buy an annuity with some of your pension pot to cover your essential living expenses and put the remainder into drawdown for flexibility. We can provide quotations on this basis if you wish.

Not ready to take your pension?

Your retirement date is flexible. If you are not ready to take benefits from your pension just yet, please let us know and we will contact you again nearer the time. If your retirement date passes and we have not heard from you we’ll set your retirement date as your 75th birthday. However you don’t have to take benefits by this date: you can take them at any time.

Next steps

If you have any queries about taking benefits from your SIPP please call us on 0117 980 9940 (Monday-Friday 8am-5pm, and Saturday 9:30am-12:30pm). We’ll be happy to help.

I would also remind you that Pension Wise, the government’s pension guidance service, provides a free impartial service to help you understand your options at retirement. Their contact details are confirmed at the beginning of this email.

Yours sincerely

--kiloran

[GeoffF100]

I am approaching 75 and am having problems with Vanguard:

viewtopic.php?p=635857#p635857

Vanguard is demanding that I take some benefits at age 75, but it seems that AJB and HL do not do that. I was going to email them tomorrow to ask. I would have emailed II too, but they do not appear to publish an email address. Does anyone know whether II demands that their SIPP customers take benefits at age 75?

[mutantpoodle]

excellent posts and for me a most interesting and important thread

I am a couple years way from 75 and fully understand that new governments will seek to change aspects of pensions especially of any that are of any size

I can see that one is allowed 25% tax free at 75, but I am not clear on whether or not one can then simply leave the full balance where it is...growing (we hope) tax effectivly
taxable at marginal rates by beneficiaries ,,,or I imagine ANY recipient if payouts are made
BUT giving the option to make PETs from that 25%, which just might avoid taxes

forward planning is complicated with elections and the current standard of our MPs, but we have to try our best!

anyone have thoughts please

[bluedonkey]

With death after 75, do beneficiaries lose the 25% tax free option?

[Arborbridge]

And I cannot remember, the SIPP being passed on to several beneficiaries, whether they can simply inherit the stocks in given percentages, or whether the whole thing must be turned into cash for distribution then re-invested. That sounds expensive.

In my case it would be split between three people.

I feel another email coming on.


Arb.

[Arborbridge]

With death after 75, do beneficiaries lose the 25% tax free option?

Good question. I do not think so, but that's worth checking - not that we can do much about it. I think our beneficiaries will also "inherit" whatever the government dishes out to them at the time.

[scrumpyjack]

excellent posts and for me a most interesting and important thread

I am a couple years way from 75 and fully understand that new governments will seek to change aspects of pensions especially of any that are of any size

I can see that one is allowed 25% tax free at 75, but I am not clear on whether or not one can then simply leave the full balance where it is...growing (we hope) tax effectivly
taxable at marginal rates by beneficiaries ,,,or I imagine ANY recipient if payouts are made
BUT giving the option to make PETs from that 25%, which just might avoid taxes

forward planning is complicated with elections and the current standard of our MPs, but we have to try our best!

anyone have thoughts please

Yes you can take the 25% at 75 and leave the rest in drawdown, but drawing down nothing. This is what I have done.
You need to give instructions to the Sipp managers as to whom the SIPP should go when you die. I gather it is sensible to include any possible beneficiary so that the manager can split it as your beneficiaries want. So my instruction includes 1% to each grandchild so if my daughter wants them to have more, and less for herself, she can ask the SIPP manager to vary the division of the pot. I have heard it said that unless you do that, they won't give anything to anyone not listed in your wishes.

[GeoffF100]

With death after 75, do beneficiaries lose the 25% tax free option?

They lose it:

Q. My client died aged 77 leaving an uncrystallised pension fund of £720,000. Is the widow entitled to 25% of this tax-free, as the client did not take their pension commencement lump sum (PCLS) before death?

A. No. PCLS is a retirement benefit. The full £720,000 represents a death benefit and, as death occurred after age 75, the widow must pay tax at their marginal rate on any payments they receive from this.

https://www.mandg.com/pru/adviser/en-gb ... ts-q-and-a

[GeoffF100]

And I cannot remember, the SIPP being passed on to several beneficiaries, whether they can simply inherit the stocks in given percentages, or whether the whole thing must be turned into cash for distribution then re-invested. That sounds expensive.

In my case it would be split between three people.

I feel another email coming on.

You can have multiple nominations:

https://www.ajbell.co.uk/pensions-and-r ... -and-death

It is also possible to inherit the fund in drawdown:

Q. My client’s husband has passed away and she is the beneficiary. She wants to use dependant’s drawdown but the current provider’s scheme doesn’t offer this. Can she transfer to another provider that does?

A. No, you can’t transfer a death benefit. The beneficiary must initially go into drawdown in the same scheme the deceased member was in when they died. There is nothing in the legislation that explicitly says this but this can be deduced from the rules that confirm what constitutes an allowable death benefit (Sections 167 & 168 and Schedules 28 & 29 Finance Act 2004) and those which confirm what a recognised transfer is (Section 169 Finance Act 2004). If the current scheme doesn’t offer drawdown her only options are a lump sum or a dependant’s annuity in line with what the scheme are offering.

https://www.mandg.com/pru/adviser/en-gb ... ts-q-and-a

[Arborbridge]

And I cannot remember, the SIPP being passed on to several beneficiaries, whether they can simply inherit the stocks in given percentages, or whether the whole thing must be turned into cash for distribution then re-invested. That sounds expensive.

In my case it would be split between three people.

I feel another email coming on.

You can have multiple nominations:

https://www.ajbell.co.uk/pensions-and-r ... -and-death

It is also possible to inherit the fund in drawdown:

Q. My client’s husband has passed away and she is the beneficiary. She wants to use dependant’s drawdown but the current provider’s scheme doesn’t offer this. Can she transfer to another provider that does?

A. No, you can’t transfer a death benefit. The beneficiary must initially go into drawdown in the same scheme the deceased member was in when they died. There is nothing in the legislation that explicitly says this but this can be deduced from the rules that confirm what constitutes an allowable death benefit (Sections 167 & 168 and Schedules 28 & 29 Finance Act 2004) and those which confirm what a recognised transfer is (Section 169 Finance Act 2004). If the current scheme doesn’t offer drawdown her only options are a lump sum or a dependant’s annuity in line with what the scheme are offering.

https://www.mandg.com/pru/adviser/en-gb ... ts-q-and-a

Having read the Bell page you've linked, it does beg a number of practical questions when there are multiple beneficiaries. If they are taking an income, presumably it just gets paid in the nominated split. But who decides if and when the portfoio should be changed? If they don't want the income, what then? Do they need to sell off the whole SIPP and incur immediate tax at their marginal rate?

I imagined there would be a mechanism in which the SIPP could be split into three (in my case) smaller SIPPs in the beneficiary names - which then go their separate ways.
Arb.

[GeoffF100]

Having read the Bell page you've linked, it does beg a number of practical questions when there are multiple beneficiaries. If they are taking an income, presumably it just gets paid in the nominated split. But who decides if and when the portfoio should be changed? If they don't want the income, what then? Do they need to sell off the whole SIPP and incur immediate tax at their marginal rate?

There is also the question of cost. If you ask AJB, I expect the answer will be "it will be charged at an hourly rate".

[thebarns]

I did ask AJ Bell a while back.

If you leave say a 1/3 each to 3 beneficiaries, then in the absence of any detailed instructions about specific shareholdings within the SiPP and how they have to be allocated upon death, then the SIPP is then split into 3 new smaller SIPPs for the beneficiaries, each getting 1/3 of the existing component shares - on the assumption all of the beneficiaries wish to carry onto running their proportionate shares of the newly formed SIPPs.

There are basically 3 options for the beneficiaries and they would be contacted by AJ Bell - 1) turn their nominated percentage of the deceased SIPP into their own annuity, 2j instruct AJ Bell to liquidate the holdings and receive a cash payout, 3j carry on with your new SIPP which in the absence of detailed instructions will comprise 1/3 holdings of the deceased SIPP components.

Each beneficiary can separately decide which of the 3 options they wish to follow.

If all beneficiaries are in agreement, certain shares could be liquidated and others kept in full, should one of two beneficiaries choose options 1 or 2.

No action is taken with the deceased’s SIPP until all beneficiaries have been contacted and intimated what they wish to be done with their share of the deceased’s SIPP.

[Dod101]

I did ask AJ Bell a while back.

If you leave say a 1/3 each to 3 beneficiaries, then in the absence of any detailed instructions about specific shareholdings within the SiPP and how they have to be allocated upon death, then the SIPP is then split into 3 new smaller SIPPs for the beneficiaries, each getting 1/3 of the existing component shares - on the assumption all of the beneficiaries wish to carry onto running their proportionate shares of the newly formed SIPPs.

There are basically 3 options for the beneficiaries and they would be contacted by AJ Bell - 1) turn their nominated percentage of the deceased SIPP into their own annuity, 2j instruct AJ Bell to liquidate the holdings and receive a cash payout, 3j carry on with your new SIPP which in the absence of detailed instructions will comprise 1/3 holdings of the deceased SIPP components.

Each beneficiary can separately decide which of the 3 options they wish to follow.

If all beneficiaries are in agreement, certain shares could be liquidated and others kept in full, should one of two beneficiaries choose options 1 or 2.

No action is taken with the deceased’s SIPP until all beneficiaries have been contacted and intimated what they wish to be done with their share of the deceased’s SIPP.

So although leaving a SIPP to say children will save IHT it will actually incur complexity if left to more than one beneficiary and of course on the tax theme, if the beneficiary decides they want the cash, they will pay tax at their marginal rate on the proceeds. This could be higher than the IHT rate!

Must ask my SIPP manager the same question.

Dod

[mutantpoodle]

qq
This could be higher than the IHT rate!
uq

yes I have that issue with 2 of my 3 children, hence my earlier question re taking the 25% for doing PETs

the easiest solution is to go before 75 !!

[Dod101]

This could be a serious issue for many. My SIPP for instance is only just over six figures and I have asked for it to go to my two children equally. I can see them saying ‘I will just take the cash’ That will cost them. I suppose if the SIPP manager will split it as described above, they might be more inclined to add it to their own SIPPs. Could that be done tax free?

Dod

[thebarns]

As I understand it, the beneficiaries’ newly formed SIPPs, are in addition and separate to any SIPPs they may have of their own and are kept separate moving forward.

And yes, should the beneficiaries opt to take a cash sum instead, they will receive this at their own marginal rate of tax, which in all likelihood, if they are earning a full time salary, will make them suffer higher rates of tax, including loss of personal allowance once their own total income plus and lump sum taken from the deceased’s SIPP, breaches the £100k mark for the year. And yes, this would be higher than IHT rates.

Again as I understand it, a SIPP will not form part of an estate for IHT purposes, under current legislation.

So beneficiaries, especially the less financially and tax savvy, should be advised by an appropriate person to think carefully about how much and when to access the deceased’s SIPP. I suppose in a number of cases they would be well advised to leave any drawdown of their bequested SIPP, until their own income reduced through retiral or reduction in working hours.

For those just desperate to get the cash sum boost, they should look to spread the receipt over a small number of years, depending on their own tax circumstances, otherwise they could be paying unexpected very high rates of tax, especially in Scotland !

[Dod101]

As I understand it, the beneficiaries’ newly formed SIPPs, are in addition and separate to any SIPPs they may have of their own and are kept separate moving forward.

And yes, should the beneficiaries opt to take a cash sum instead, they will receive this at their own marginal rate of tax, which in all likelihood, if they are earning a full time salary, will make them suffer higher rates of tax, including loss of personal allowance once their own total income plus and lump sum taken from the deceased’s SIPP, breaches the £100k mark for the year. And yes, this would be higher than IHT rates.

Again as I understand it, a SIPP will not form part of an estate for IHT purposes, under current legislation.

So beneficiaries, especially the less financially and tax savvy, should be advised by an appropriate person to think carefully about how much and when to access the deceased’s SIPP. I suppose in a number of cases they would be well advised to leave any drawdown of their bequested SIPP, until their own income reduced through retiral or reduction in working hours.

For those just desperate to get the cash sum boost, they should look to spread the receipt over a small number of years, depending on their own tax circumstances, otherwise they could be paying unexpected very high rates of tax, especially in Scotland !

In fact it makes me wonder if for relatively small SIPPs such as my own I might not be better to run it down. Certainly there seem few tax advantages in retaining it for the next generation.

Dod