SIPP – inheritance tax
Learn more about SIPP IHT (inheritance tax) and what happens to your SIPP after you die.
SIPPs can help you to pass on your savings to your beneficiaries free from UK tax. There are a number of options you can choose from when planning your estate management. This page will explain more about SIPP and IHT planning.
Frequently asked questions about SIPPs and inheritance tax
- What happens to my SIPP after I die?
- What are the new SIPP inheritance rules?
- Who will inherit my pension and how much tax will need to be paid?
- What if I've bought an annuity?
- How are SIPP death benefits paid?
- What tax will need to be paid?
- What happens to my SIPP when the beneficiary dies?
- How can I use my SIPP to cut my inheritance tax bill?
What happens to my SIPP after I die?
You are in control of what happens to your SIPP in the event of your death. You can decide who will inherit your SIPP - whether a family member, friend or a charity. You can also split your SIPP between various beneficiaries, in any proportion.
Your pension does not normally form part of your estate. If you have not nominated a beneficiary, your pension trustees will be responsible for deciding what happens to your SIPP.
What are the new SIPP inheritance rules?
Under new rules for SIPP Inheritance, it is possible to pass your pension pot on to your beneficiaries without being liable for tax. If you die before the age of 75, and the funds are transferred within two years of your death, the inheritance will be tax-free. If they choose to take the benefit as a lump sum, but do not claim it within the two-year period, then they will pay income tax on the benefit.
What if I have bought an annuity?
If you have used funds from your SIPP to buy a lifetime annuity, these payments will usually stop when you die. However, when you buy your annuity, it may be possible to stipulate that your annuity be passed on to a beneficiary, either as a lump sum or regular payment. This can usually only be decided at the start of the contract.
Any funds remaining in your SIPP will be passed on tax-free if you die before the age of 75, or subject to tax if you are over 75.
How are SIPP death benefits paid?
Your beneficiaries can decide whether they would like to receive their benefits as a lump sum, or draw an income from the fund. The amount of tax to be paid would depend on your age at death, and whether the funds were transferred within two years of your death.
There is no difference in the way either option would be taxed. If you are over 75 when you die, and your beneficiary is not an individual (for example, a trust), the benefits will be paid as a lump sum taxed at 45%.
What tax will need to be paid?
The rules on SIPP and inheritance tax depend on the age of the pension holder when they die. If you die before the age of 75, your beneficiaries will not pay any inheritance tax on your SIPP. The only exception is if they choose to take the benefit as a lump sum but do not claim it within two years.
If you are 75 or older when you die, then tax will need to be paid on your pension fund. Whether your beneficiaries take the money as an income or lump sum, it will be subject to income tax. If you do not leave your fund to an individual (for example, you nominate a fund), then benefits will be paid as a lump sum, taxed at 40%. If you leave your pension fund to a charity, and you have no surviving dependents, then this will not be taxed.
What happens to the SIPP when the beneficiary dies?
If there are funds remaining in your pension when the beneficiary dies, these can be passed on again to a successor chosen by the beneficiary. The tax status of this inheritance would depend on the age of the beneficiary on their death: if they were under 75, then their successors would pay no tax on the benefits, regardless of your age on death.
The successor can choose whether to receive the benefit as a lump sum or draw an income from it. There is no limit to how often a pension fund can be passed on, so long as there are still funds remaining.
How can I use a SIPP to help cut my inheritance tax bill?
Your SIPP is not classed as part of your estate for inheritance tax purposes, meaning it will not be subject to tax at the normal rate of 45% for assets above £325,000. As a result, your beneficiaries will be able to receive death benefits as a lump sum or fixed income, free from tax if you are under 75 when you die and the funds are transferred within two years of your death, or subject to income tax if you are 75 or over. We always recommend you consult a qualified financial adviser before making decisions about estate planning.
Open a SIPP by 3 April 2020 and pay no SIPP fee until April 2021.
This means your service plan fee of £9.99 covers you for all of your investment accounts. Following the offer period, the ii SIPP fee is only £10 a month more, and could save thousands compared to other pension providers who charge a percentage fee. Terms apply