What happens to my SIPP when I die?
We get lots of enquiries from people who saved into a SIPP and would like to know what happens with the pension fund on the death of a member. In order to clarify how SIPP death benefits are distributed we have compiled this detailed article which covers the following:
- What happens to a SIPP on the death of a member?
- How are SIPP death benefits paid?
- Is a SIPP subject to inheritance tax?
- Speak to a SIPP expert
What happens to a SIPP on the death of a member?
Self invested personal pensions are a unique method of retirement savings allowing for a significant amount of investment freedom within a tax-efficient wrapper.
As with all pension funds, the hope and aim is you will eventually reap the rewards from your savings during a long and fruitful retirement. But, what happens to your SIPP if or when you die either before or during retirement?
SIPP rules on death: who gets my SIPP when I die?
Like all personal pensions, a SIPP is a form of money purchase scheme and follows the same rules in the event of a member’s death. At some stage during the life of your SIPP you will need to nominate beneficiaries who you would like to receive your pension benefits after your death.
You are allowed to nominate whoever you like, this could be:
- Your spouse or life partner
- Children or grandchildren
- Wider family (cousins, nephews/nieces etc)
- A close friend or work colleague
- A charity
If you want to select a combination of people, you can also allocate a proportion of your SIPP to each beneficiary. For example, you could allocate 50% to your spouse, 20% to a child, 5% to a charity and so on.
It’s important you inform your SIPP provider of who you would like to nominate as beneficiaries using an expression of wishes form and that this is kept up to date should you want to make any changes.
What happens to my SIPP if I die with no beneficiaries?
An expression of wishes form is not actually a binding document, it is more of a guide to help SIPP pension scheme administrators and trustees choose beneficiaries on the death of a member.
If a member dies having not completed any expression of wishes, trustees will usually still look to pay out any SIPP pension death benefits to living dependents in the first instance.
If there are no dependents the scheme administrators have the power to nominate any other individual or entity (a charity, for example) to receive these benefits. This is why it’s very important to maintain an up to date expression of wishes document.
What happens to a SIPP on the death of a beneficiary?
A beneficiary of your SIPP death benefit can also complete their own expression of wishes form and nominate their own beneficiaries. If your nominated beneficiary dies while still receiving a pension from your SIPP then these benefits are cascaded down to their beneficiaries.
This process continues until there are no more funds left within the SIPP pension.
How are SIPP death benefits paid?
How your SIPP fund is paid out to beneficiaries will depend on how old you are at the time of your death, specifically whether you die before or after reaching 75 years of age.
What happens to my SIPP if I die before 75?
All proceeds from a SIPP are paid tax free to a nominated beneficiary on the death of a member if they were under the age of 75 when they died. These funds can be paid out either as a lump sum or as an income.
This is on the proviso that the benefits are allocated within 2 years of the original SIPP member’s death. If they are allocated after 2 years then the benefits received will be taxed at the beneficiaries marginal rate of income tax.
If you have exceeded your lifetime allowance (LTA) – currently £1,055,000 – at the time of your death then the amount of uncrystallised funds over and above the LTA will be subject to a tax charge (55% for lump sums and 25% for any income payments).
The tax charges for exceeding the LTA do not apply if a beneficiary receives the proceeds from a SIPP pension pot more than 2 years after the member’s death.
Any funds inherited are considered cascading benefits and do not count towards a beneficiaries own LTA.
What happens to my SIPP if I die after 75?
Any SIPP death benefits received by a beneficiary as a result of a member dying after reaching age 75 can still be taken as either a lump sum or as a regular income, however, these benefits will now be taxed at their marginal rate.
If a trust or company is one of the beneficiaries, these funds will be paid as a lump sum and subject to a tax charge of 45%. SIPP death benefits paid to a charity will not usually be subject to tax.
What happens to my SIPP if I die before retirement?
If death occurs before your chosen retirement age and your SIPP has not yet been drawn down for income purposes, the fund can be passed on to your beneficiaries free of any income tax as long as the SIPP death benefits are paid out within 2 years.
Is a SIPP subject to inheritance tax?
The proceeds from a SIPP pension do not form part of your estate for inheritance tax purposes if they have remained uncrystallised at the time of your death. If, for example, you have taken the 25% tax free lump sum out of the fund and this is now in your bank account, this would form part of your estate for IHT purposes.
New SIPP inheritance rules introduced in April 2015 reduced the tax liability for any lump sums paid to a beneficiary in receipt of SIPP death benefits when a member dies beyond age 75 from 45% to their marginal rate of income tax.
If you’re in the process of inheriting a SIPP and want to understand what tax may be liable, whether taking a lump sum or income, make an enquiry and we can arrange for a specialist to get in touch.
What happens to SIPP property on death?
There are a number of options. Firstly, your beneficiaries can set up drawdown accounts and earn a percentage of the fees and rental income the property is generating after the SIPP has been transferred into their name/names.
Alternately, your beneficiaries might have the option to remove the property from the SIPP and own it personally, although this may not be tax efficient.
Other alternatives available to beneficiaries include purchasing the property from the SIPP or selling it – make an enquiry to speak with an expert and discuss which course of action is right for your needs and circumstances.
Speak to a pension expert about your SIPP options on death
Understanding what happens to a SIPP when you die is quite an important aspect of your retirement planning. Lots of people in your situation seek professional advice to assist them before proceeding with this type of pension or nominating any beneficiaries.
If you have questions and want to speak to an expert for the right advice, call Online Money Advisor today on 0808 189 0463 or make an enquiry here.
Then sit back and let us do all the hard work in finding the pensions advisor with the right expertise for your circumstances.