SIPP Inheritance Tax: how it works

When you die, any money that’s left in your SIPP will usually be paid to the person, people or charities you’ve chosen. 
 
All you need to do is complete your provider’s ‘expression of wishes’ form to nominate your beneficiaries and state how you would like the money to be split (if you’re leaving your pot to more than one beneficiary). 

Pension trustees have the discretion to decide who receives your death benefits and will consider factors such as whether you have any financial dependants. However, in the vast majority of cases, they will follow the wishes you’ve set out.

If you don’t nominate any beneficiaries, the trustees of your SIPP will make the decision on your behalf. 

Once your nominated beneficiaries have inherited your SIPP, they are free to decide how they’ll access it. For example, they may take the money out in one or more lump sum withdrawals, or take an income from it. However, there’s no obligation to make any withdrawals from the pension, and if they prefer, they can leave the pot invested until they need it. 
 
If the beneficiary dies before withdrawing all the funds, the money can be passed on to beneficiaries of their choice. These are referred to as successors. It’s also important to note that only nominated beneficiaries, dependants and successors can use drawdown. Other beneficiaries will need to take the money as a lump sum. 
 
Whether your beneficiaries will pay tax on the SIPP funds they inherit will depend on how old you are when you die:
 

• If you die before age 75: Beneficiaries usually pay no income tax on inherited SIPPs, whether they take the money as income or a lump sum. However, for lump sums to be paid tax-free, you must have enough Lump Sum and Death Benefit Allowance (LSDBA) remaining. This allowance caps tax-free pension benefits at £1,073,100 for most people. Find out more about lump sum allowances.  
• Timing is important to ensure payments are made tax-free. Lump sum payments will need to be made within two years of death. Or, if beneficiaries decide to use drawdown, they will also need to ‘designate’ the funds within two years (this is the process of transferring them into their name).
• If these deadlines are missed, income tax may be payable. If you were already in drawdown at the time of your death, and your beneficiaries wanted to take a lump sum, the funds would also need to be paid within two years, otherwise income tax would be charged. The two-year rule doesn’t apply if you were in drawdown and your beneficiaries decide to use drawdown too. 
• If you die at age 75 or older: Individual beneficiaries will need to pay income tax on income and lump sum withdrawals at their marginal rate of tax. Payments into trusts will be taxed at 45%. However, when beneficiaries access the money they will get a tax credit which can be offset against their own tax bill. 

In summary… 
 
Currently, the tax on inherited SIPPs will depend on: 

• Whether you die before or after age 75 
• The rate of income tax your beneficiaries pay if death occurs after age 75 
• Whether beneficiaries are designated within two years of your death 
• How beneficiaries decide to withdraw funds (lump sums or income) 

In the Autumn 2024 Budget, the Chancellor announced that from April 2027, pensions will become subject to Inheritance Tax. 
 
While the rules are yet to be finalised, from 6 April 2027 it is expected that: 
 

• The value of any unused pension funds – as well as certain death benefits – will be included in your estate for IHT purposes. 
• Pensions will be treated like other inherited assets and taxed at a rate of 40% on any amount over your tax-free threshold. The nil rate band (NRB) is currently £325,000, but if you are married (or in a civil partnership) or passing on a family home to children or grandchildren, you may have a higher allowance. 

 
The new rules are not expected to affect: 

• SIPPs inherited before 6 April 2027
• Dependant scheme pensions (income paid by defined benefit pensions to a member’s dependant, after they have died) 
• Lump sum payments made to charities  

Keep an eye out for updates when the rules are finalised. For more details, see our guide on pension inheritance tax changes.  

• IHT will be charged at a rate of 40% on the value of your estate that is over your tax-free threshold (the nil rate band). From 6 April 2027, your estate will be the total value of all your assets including your home, savings, investments and pensions, less any debts such as outstanding mortgages. 
• The current nil rate band is £325,000. But, if you’re passing on your family home to children or grandchildren, you can also claim the residential nil rate band (RNRB), worth a further £175,000. This gives homeowners a tax-free allowance of £500,000. (The RNRB is tapered away if your estate is worth £2m or more) 
• No IHT is payable when you pass money to your spouse (or civil partner). Any unused nil rate band can be passed on too. This means a married couple, with a family home that’s going to direct descendants, can pass on as much as £1m between them, before they need to pay IHT. 
• Any IHT that is payable will be deducted before your estate is distributed to your beneficiaries. 
• If you’re worried about inheritance tax, it’s worth talking to a financial adviser that specialises in estate planning to explore ways to reduce it. 

By planning ahead it may be possible to reduce the amount of IHT due to be paid. 
 
We've included below a list of options available to help reduce your Inheritance Tax bill:
 

• Giving money away during your lifetime: There are several allowances you can use to give money away IHT free. For example, you can give away £3,000 a year tax-free, or £5,000 when your child gets married. You can also give away as much as you like from your income, using regular gifts from surplus income rules, so long as you can provide evidence that they did not affect your standard of living. Larger gifts outside the scope of these allowances will become tax-free if you live a further seven years. Remember to keep clear records of large gifts.
• Spending more money now: Enjoying the wealth you have spent a lifetime accruing can also reduce the tax bill you eventually face - but don’t spend more than you can afford.
• Writing a will: Depending on your circumstances, it may be possible to structure your will in a way that ensures your wealth is distributed more tax-effectively.  
• Leave money to a charity when you die: No IHT will be charged on money left to charities or registered sports clubs in your will. If you leave more than 10% of your taxable estate to charity, the rate you pay on your overall estate will also drop from 40% to 36%. 
• Use life insurance: It’s also possible to buy a whole of life insurance policy that will cover your IHT bill when you die.
• Use trusts: Paying money into a trust can be an effective way of controlling how your wealth is distributed and help you ringfence assets from IHT.
• Invest in an AIM portfolio: Currently no IHT will be payable on any shares you have that are listed on the Alternative Investment Market (AIM) as they qualify from Business Property Relief. However, from 6 April 2026, that relief will be halved (meaning the effective IHT rate on these assets will be 20%). 
• Equity release: If your wealth is tied up in your home, you may be able to unlock funds by using a lifetime mortgage, enabling you to make gifts during your lifetime and reduce the value of your estate. 

However while there are numerous ways to mitigate IHT, estate planning can be complex. The right way to cut your IHT bill, will depend on a number of factors including your age, attitude to risk, personal circumstances and state of health. 

In particular, you must take care to ensure that you don’t give away or lose access to money you may need in later life. 

This means it’s important to get professional advice, from a regulated financial planner that specialises in estate planning. STEP (The Society of Trust and Estate Practitioners) has a directory to help you find a specialist near you.