What happens to my SIPP when 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, subject to your remaining Lump Sum and Death Benefit Allowance (LSDBA).

If you die before the age of 75, and the funds are designated within two years of your death, the inheritance will be tax-free if taken as a regular income and any lump sums will be tax-free if they are within your remaining Lump Sum and Death Benefit Allowance (LSDBA).

Any lump sum death benefits paid from funds that were crystallised before 6 April 2024 will not be tested against the LSDBA, since they will have already been tested against the old Lifetime Allowance (LTA).

Anything over your remaining allowance will be taxed at your beneficiary’s marginal rate of income tax. 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. 

Who will inherit my pension and how much tax will need to be paid?

You can nominate anybody to inherit your pension. You can set up or review beneficiaries at any time from your ii SIPP account. The amount of tax to be paid will depend on your age, and the status of your pension. 

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, subject to your remaining Lump Sum and Death Benefit Allowance (LSDBA), 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 designated within two years of your death. 

There is zero tax to pay on your remaining pension when taken out as income. If it is taken as a lump sum it will be tax-free subject to your remaining Lump Sum and Death Benefit allowance (LSDBA). Any lump sum death benefits paid from funds that were crystallised before 6th April 2024 will not be tested against the LSDBA, since they will have already been tested against the old Lifetime Allowance (LTA). The balance over your remaining allowance will be taxed at your beneficiary’s marginal rate of income tax. Read more about Lump Sum Allowances.

If you die after turning 75, your beneficiaries will have to pay income tax on the money they inherit.

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 and whether the funds were designated within two years of your death. If you die before your 75th birthday, your pension will be passed to your chosen beneficiaries.

There is zero tax to pay on your remaining pension when taken out as income. If it is taken as a lump sum it will be tax-free subject to your remaining Lump Sum and Death Benefit Allowance (LSDBA).

Any lump sum death benefits paid from funds that were crystallised before 6th April 2024 will not be tested against the LSDBA, since they will have already been tested against the old Lifetime Allowance (LTA).

The balance over your remaining allowance will be taxed at your beneficiary’s marginal rate of income tax. Read more about Lump Sum Allowances.

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 45%. 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.