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        Updated: April 22, 2024

        What Happens To A SIPP When You Die?

        If you save into a SIPP and are unsure about what happens to your pension benefits when you die, this guide should answer your questions.

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        Self-invested personal pensions (SIPPs) can be a highly lucrative and flexible way to fund your retirement but what happens if you don’t live long enough to fully reap the benefits?

        We’ve put this guide together to answer the most common questions about SIPP death benefits, including who can inherit a SIPP, the implications for inheritance tax and why it’s worth speaking to an expert now for extra peace of mind.

        What happens to your SIPP when you die?

        As for most pensions, the funds held within your SIPP can be transferred to another person or to more than one person when you die.

        They can also be donated to certain other legal entities. Who gets what, and in what proportion, is entirely up to you.

        If you die before taking your pension benefits

        If you die before your chosen retirement age and have not yet drawn down any income, the funds in your SIPP can be passed on in their entirety to your beneficiaries, tax-free.

        The payments must be made to them within 2 years of your death however, otherwise tax charges will apply (they may still apply if your fund value exceeds the lifetime allowance).

        55 is the youngest age you can take money out of your SIPP, if you die before taking any lump sums or income the funds will be uncrystallised and can be passed on tax-free, if it’s paid to your beneficiaries within 2 years of your death.

        What happens to a SIPP in drawdown upon your death?

        Your beneficiaries can choose to take the funds as a lump sum or to set up regular payments via an annuity, but the tax implications for them will depend on how old you are when you die.

        If you die before age 75

        Your nominated beneficiaries will receive the funds tax-free, whether they choose to take them as lump sums or as a regular income (by purchasing an annuity).

        These benefits must be allocated within 2 years of the scheme learning of your death, however, or they will still attract a tax charge.

        If you die having exceeded your lifetime allowance (LTA) — which is £1,073,100 at the time of writing (November 2022) — then any uncrystallised funds above the LTA threshold will be taxable at a rate of 55% for lump sums or 25% for any income payments.

        If you die after age 75

        If you die age 75 or older, any money paid out to beneficiaries from your SIPP will be taxed as income if taken as regular payments or as a lump sum at the recipient’s marginal rate of income tax.

        This tax liability for individuals has been lightened somewhat in recent years however, thanks to changes to SIPP inheritance rules introduced in April 2015.

        These reforms reduced the rate that beneficiaries must pay on lump sums from 45% to their own marginal rate of income tax.

        Trusts or companies in receipt of death benefits will still have to pay a tax charge of 45% on any lump sums they receive in this scenario, but sums paid out to charities won’t usually be taxed at all.

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        Who can inherit the benefits?

        As soon as you start saving into a SIPP, you can tell the scheme owner who you want to inherit the proceeds when you die. You should be able to add and remove these beneficiaries at any time.

        You can choose whoever you like as a beneficiary, for example:

        • Your spouse or life partner
        • Children or grandchildren
        • Wider family (cousins, nephews/nieces etc)
        • A close friend or work colleague
        • A trust or company
        • A charity

        You’ll need to let your provider know who your beneficiaries are by filling out an ‘expression of wishes’ form, and it’s your responsibility to keep this up to date if your circumstances change.

        If you’re naming multiple beneficiaries, you can also use the expression of wishes form to set out how much you want each party to receive, e.g., you could allocate 50% to your spouse, 20% to a child, and the remainder to various charities.

        What if you don’t nominate anyone?

        If you die without telling your provider about any beneficiaries, the good news is that death benefits will still usually go to any living dependents. This is because your expression of wishes is not legally binding, but more of a guide to help scheme administrators allocate funds.

        However, we strongly advise you to add your beneficiaries as soon as you can, particularly if you have no dependents. In this scenario the scheme provider has every right to pass those benefits on to whichever individual or entity they choose, which could make things hard for any surviving family members.

        And if you have no beneficiaries?

        Even if you currently have no family members or friends you want to nominate, it’s worth thinking about where you’d like your SIPP proceeds to go if you die before reaping the benefits, for example to a charity or cause you care about.

        Does a SIPP form part of your estate for inheritance tax purposes?

        No: under the broader pension rules SIPPs are exempt from inheritance tax (IHT) and do not form part of your taxable estate. This is only the case if they remain invested in the SIPP at the time of your death; in other words, untouched in your pension fund and not sitting in your bank account.

        If you have already made withdrawals from your SIPP — say, in the form of a 25% tax free lump sum — then the withdrawn amounts will be part of your estate and subject to IHT.

        What happens to any property held within your SIPP?

        Your beneficiaries will have several options: they could set up drawdown accounts and earn a percentage of the rental income being generated by the property, or they may be able to purchase the property from the SIPP and sell it on.

        In some cases, they may wish to remove it from the SIPP and own it personally, but this may not be tax efficient. Speak to an expert to discuss the best course of action in your circumstances.

        Does an inherited SIPP affect a beneficiary’s lifetime allowance?

        No, death benefits do not affect the recipient’s own lifetime allowance (LTA). Their LTA is only affected by the amount they have personally built up in their pension savings.

        However, there are some rare circumstances where they would have to pay a LTA tax charge on your behalf, specifically if you pass on a sum that is higher than your own LTA (currently £1,073,100).

        In this case the rates of tax would be:

        • 55% on a lump sum
        • 25% on any other type of payment such as annuities or money from a drawdown fund.

        Speak to a pension advisor who specialises in SIPPs

        Deciding what to do with your SIPP after death is an important part of your retirement planning and you’ll want to do all you can to secure the best financial outcome for your relatives if you die sooner than expected.

        Many people seek professional advice to help them make the right decisions before they nominate beneficiaries, and this is one area where the experienced pensions advisors we work with can help.

        To get matched with an expert for the right advice, call us today on 0808 189 0463 or make an enquiry here.

        Then sit back and let us do all the hard work in finding the ideal pensions advisor for your needs.

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        If a beneficiary dies while taking benefits from your SIPP, these will be cascaded down to anyone they have nominated in their own expression of wishes declaration. If there isn’t one in place, the scheme administrators get to choose where the remaining funds go.[JG1] [MW2]

        So, anyone receiving death benefits should name any potential future beneficiaries to ensure their wishes are carried out.

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        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions. Ask us a question and we'll get the best expert to help.

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        Tony Stevens

        Finance Expert

        About the author

        Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

        Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

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