I’m currently 70 years old and intend to leave whatever is left in my SIPP to my granddaughter who is 17 years old.

What are the current regulations regarding at what age she would be allowed to access the money, and is there any method to ensure it stays invested until she is of pensionable age?

John

Rachel Vahey,  AJ Bell Head of Public Policy, says:

Pension savers have a lot of flexibility to decide who to leave their pension fund to. But as with many elements of pensions, the rules can sometimes be quite complicated.

Pension money is usually held within a discretionary trust. This means the trustees or scheme administrator is responsible for the money and must make decisions in the best interests of the pension scheme members.

The final decision of who receives the pension pot when a member dies rests with the trustees or scheme administrator. However, pension savers can make their wishes known and nominate anyone they want to have the pension funds when they die.

DEPENDANTS NEED TO BE LOOKED AFTER

When paying out the money the trustees want to make sure any dependants of the member are financially looked after. Usually, they would be inclined to pay out to a spouse or partner living with the member. (And this usually matches the nominations people make – most want to make sure their loved ones have enough money.)

A pension saver could, however, nominate someone else to inherit the funds, for example children or grandchildren. The trustees or scheme administrator would then consider that person. If the pension saver still has a dependant living, then the trustees or scheme administrator will want to make sure that person will have enough money from other sources to live on. It’s important in this situation to give the trustees or pension scheme sufficient information to help them make this decision.

When someone inherits the pension fund from a SIPP, they may be able to access the funds by taking a lump sum, buying an annuity to give themselves a guaranteed income for life, or they could move the money into drawdown and take the money out gradually to suit their needs or leave it to continue investing.

A nominee or dependant inheriting pension money gets the money straightaway – they do not have to wait to reach age 55 or 57. However, if younger children inherit the funds, they could be kept in a pension with their legal guardian controlling investments and withdrawals until they turn 18.

However, a pension saver could consider setting up a ‘bypass’ trust to add some rules or control over who inherits the pension money, how they can take it and when.

MAKING A NOMINATION

The pension saver nominates the trust to receive their pension as a lump payment on their death. They choose the trustees and can give them clear instructions which are more nuanced than pensions allow. For example, they could say pay out an income rather than a lump sum, or put a minimum age for the beneficiary to access the pot.  

If the pension saver dies after age 75 there will be a 45% tax charge when the pension pot is paid to a bypass trust, although the beneficiary may be able to claim some or all of this back when they receive income from the trust. Before age 75 it will be tax free if the pension saver has enough remaining lump sum and death benefit allowance and paid within two years of the pension scheme being told about the pension saver’s death. Anything over will be taxed at the trust tax rate.

When the benefits are paid out, they will be tax free if the pension saver died before age 75. Otherwise, the payments from the trust will be added to the beneficiary’s income for tax purposes. If 45% tax was deducted this can be used to offset any income tax due.

There may be IHT charges on every 10-year anniversary of the trust (the periodic charge) or whenever property leaves the trust (the exist charge). The working out of these taxes can be very complex. And there are other tax considerations to bear in mind as well.

It’s for these reasons, individuals considering a bypass trust need to take care. Although they can exert extra control, that comes with additional costs and taxes. Anyone thinking about this should seek specialist advice.

‹ Previous2024-06-13Next ›