I am interested in planning for my beneficiaries as much as my own finances. I understand that my SIPP beneficiaries can inherit their share as a SIPP. Is that right? If they have (or open) an AJ Bell SIPP, can they inherit into their SIPP directly, all done within AJ Bell, not having to go via an external cash payout?

Could it be done ‘in specie’? Would their SIPP be exactly as if they had earned the money and paid in to their SIPP, or would it be different? Would its crystallisation status be the same as the crystallisation status of my SIPP, or would it all be as if crystallised or would it all be as if uncrystallised?

Graham

Rachel Vahey, 

AJ Bell Head of Public Policy, says:

One of the big attractions of saving into a defined contribution pension – such as a SIPP – is the ability for your family and loved ones to inherit your pension pot when you die.

It’s worth recapping who can inherit, how they can take the funds, and what tax they may pay.

WHO CAN INHERIT?

First – who can inherit? The answer is a pension saver can nominate anyone to receive their pension pot. This could be a family member, or it could be someone unrelated. It doesn’t have to be someone who is financially dependent on the pension saver.

The pension saver nominates the person by making an expression of wishes, also called a nomination. This can be done in writing and many pension providers will have a form for this.

However, ultimately, it’s up to the trustees of the pension scheme to decide who does inherit. In deciding this they will look at the expression of wishes, and probably any will for information – but they are not bound by either document. They will also look at the individual’s family position, including who was financially dependent on them.

If the chosen beneficiary is either a dependant or a nominee, then they can choose to take the inherited pension pot as an income through drawdown, for example in a SIPP, (or buying an annuity with the pot) or as a lump sum. If the chosen beneficiary is not a dependant or nominee, then they can only take the funds as a lump sum. This reduces their options considerably, especially if they want to control the amount of tax they pay by taking out the funds gradually. So, it’s always good to make sure nomination forms are up to date to give your loved ones as many options as possible.

IT DEPENDS ON THE SCHEME

If the beneficiary is a nominee or dependant and chooses to take drawdown then usually they will have a choice about whether to take it through a beneficiary’s drawdown plan with the original pension scheme or with a different provider, for example in a SIPP. However, that depends on the pension schemes. Some schemes may not offer the ability to take a beneficiary’s drawdown within their rules, and in these circumstances the beneficiary will have to transfer to another pension scheme.

If the beneficiary transfers to another pension scheme, then whether they could do that in specie or whether they have to sell their investments and transfer them as cash will again depend on the rules of the pension schemes involved, and probably what sort of investments the pension pot holds.

It’s worth asking pension schemes what their rules say. The AJ Bell SIPP will offer your beneficiary a beneficiary’s drawdown plan with us. But if they want to transfer we will facilitate an in specie transfer where the receiving scheme is happy to accept the investments.

A beneficiary’s drawdown plan is usually held separate to any other pension account the beneficiary has with the pension provider. They can take an income from the beneficiary’s drawdown plan from any age – they do not have to be age 55 or over. They can only take an income – they cannot take any tax-free cash lump sums, even if the member had not taken any lump sums in their lifetime, so these payments won’t affect their lump sum allowances for their own pension savings.

WHAT ABOUT TAX?

Finally, taxation. If the pension member died before age 75, then any lump sums will be tax free, as long as the value of the lump sum when added to all the other tax-free lump sums the member received during their lifetime and were paid out on death is less than their Lump Sum and Death Benefit Allowance. This is usually set at £1,073,100. Any excess would be taxed as the beneficiary’s income.

(Just to note if there are still funds in the beneficiary’s drawdown plan when they die, then these funds will count towards the beneficiary’s own Lump Sum and Death Benefit Allowance when their successor is working out whether they have to pay income tax on any lump sums received.)

If the beneficiary instead took an income from a drawdown plan or annuity, then this would always be tax free, regardless of how much money there was in the account and across all the member’s pension pots.

If the member was aged 75 or over when they died, then any lump sum or income paid to the beneficiary will be taxed in the same way as income.

Currently, the pension pot is usually free from inheritance tax. The government has proposed changing this so, from April 2027, it will be included in the estate for inheritance tax. However, we have not yet received final rules, and this position could change before that date.

DISCLAIMER: AJ Bell referenced in this article owns Shares magazine. The author (Rachel Vahey) and editor (Tom Sieber) of this article own shares in AJ Bell.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to askrachel@ajbell.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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