Having googled, I've read that if I die before 75, my pension pot goes to my beneficiaries without any tax to pay. Do understand correctly that if I have 100k in my sipp, I can nominate a beneficiary who gets the whole lot in cash to spend without any tax paid? It seems too good to be true (apart from dying to achieve it).
If so, assuming I have enough assets to pay IHT, it seems to me to have the following implications (ignoring all other considerations):
I should nominate my son as beneficiary rather than my wife, as in the latter case my although my wife would get the sipp contents tax-free, on her death there would be iht on that sum if it didn't get spent.
I should now be spending my isas rather than my sipp, as on death the remaining isas will be subject to iht but the sipp won't.
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Pension pot on death
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- Lemon Slice
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- Lemon Half
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Re: Pension pot on death
Isn't it possible for the beneficiary to keep the proceeds in the pension? If so then they could (optionally) just take a (taxable) income from it and then pass it on IHT-free in turn on their death.
(I'm not 100% sure of this).
Scott.
(I'm not 100% sure of this).
Scott.
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- The full Lemon
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Re: Pension pot on death
That is my understanding. If the owner of the SIPP dies before his 75th birthday, the beneficiary can take the lump sum tax free or take an income (as in drawdown) also tax free.
After age 75, the beneficiary can take an income from the SIPP or the lump sum but in both cases the cash will be taxed as the recipient's income. If paid to a charity it will be paid tax free.
In both cases it is usually paid free of IHT provided the trustees (usually your SIPP provider) has full discretion as to where the proceeds will be paid on death, that is you have given them a letter of wishes, not an instruction. Best to check with your provider.
That is of course until the rules are changed again.
Remember that if you start to drawdown from a SIPP at any age, you will need to pay income tax on these withdrawals.
Dod
After age 75, the beneficiary can take an income from the SIPP or the lump sum but in both cases the cash will be taxed as the recipient's income. If paid to a charity it will be paid tax free.
In both cases it is usually paid free of IHT provided the trustees (usually your SIPP provider) has full discretion as to where the proceeds will be paid on death, that is you have given them a letter of wishes, not an instruction. Best to check with your provider.
That is of course until the rules are changed again.
Remember that if you start to drawdown from a SIPP at any age, you will need to pay income tax on these withdrawals.
Dod
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- Lemon Slice
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Re: Pension pot on death
Yes, if you die before age 75, your beneficiaries can take the lump sum or keep the pension in drawdown completely tax free.
Not only that, but if it is kept in drawdown, then whatever is left can be passed on to whoever your beneficiary nominates. If your beneficiary dies before age 75, then again it is tax free. And so on until the money is spent.
If anyone dies after the age of 75, the inheritor pays tax on it at their marginal income tax rate (whether they take income or lump sum). But again, if the inheritor dies before 75, their beneficiary gets it tax free again. Tax treatment depends on the age of the previous holder at death.
It is quite a wheeze isn’t it? Though of course limited by the lifetime allowance (of the original member, not of the beneficiaries) and also by ones need to actually use the pension to live on...
In your case, I don’t see a disadvantage to your wife inheriting your SIPP, and then she can pass on to your son any remaining assets on her death. I think your decision needs to take into account what your wife might need in the way of assets if you die first, rather than being too driven by tax considerations. In principle though I think your conclusion about spending SIPP assets last, after ISAs and taxable assets, is correct.
I believe you could also nominate more than one beneficiary in whatever proportions you wish. But my understanding is also that the pension trustees have ultimate discretion, and don’t have to follow your nomination - so for example they might feel that your dependent wife should inherit rather than your adult son. But, you should of course check that with your provider.
Not only that, but if it is kept in drawdown, then whatever is left can be passed on to whoever your beneficiary nominates. If your beneficiary dies before age 75, then again it is tax free. And so on until the money is spent.
If anyone dies after the age of 75, the inheritor pays tax on it at their marginal income tax rate (whether they take income or lump sum). But again, if the inheritor dies before 75, their beneficiary gets it tax free again. Tax treatment depends on the age of the previous holder at death.
It is quite a wheeze isn’t it? Though of course limited by the lifetime allowance (of the original member, not of the beneficiaries) and also by ones need to actually use the pension to live on...
In your case, I don’t see a disadvantage to your wife inheriting your SIPP, and then she can pass on to your son any remaining assets on her death. I think your decision needs to take into account what your wife might need in the way of assets if you die first, rather than being too driven by tax considerations. In principle though I think your conclusion about spending SIPP assets last, after ISAs and taxable assets, is correct.
I believe you could also nominate more than one beneficiary in whatever proportions you wish. But my understanding is also that the pension trustees have ultimate discretion, and don’t have to follow your nomination - so for example they might feel that your dependent wife should inherit rather than your adult son. But, you should of course check that with your provider.
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- Lemon Slice
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Re: Pension pot on death
Also regarding ISAs - these can be passed on to your wife without losing the tax free wrapper, although you are right that they are within your estate for IHT purposes.
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