Did you know that pensions can be a tax-efficient way to pass on wealth? It\u2019s because most people won\u2019t have to pay inheritance tax on a SIPP they inherit.<\/p>
In this guide we take a closer look at SIPP inheritance tax. We also answer common questions like, \u201cwho works out the tax due on a SIPP?\u201d and \u201cwhat happens if the beneficiary dies before drawing on a pension?\u201d.<\/p>
When someone dies, inheritance tax is a tax due on assets owned when they die. However, generous tax-free allowances mean that many people don\u2019t have to pay any inheritance tax.<\/p>
The nil rate band (tax-free allowance) is currently \u00a3325,000 for a single person and they may get an extra \u00a3175,000 residence nil rate band if they own a property. Any taxable assets worth more than a person\u2019s nil rate band will often incur a 40% tax charge.<\/p>
Self-invested personal pensions<\/a> (SIPPs) are usually outside the pension owner\u2019s taxable estate. SIPP inheritance tax is only charged in very rare circumstances. In most cases, a SIPP is therefore inherited with no inheritance tax to pay.<\/p> If you have funds in your SIPP when you die then these can be passed on to a beneficiary. You can nominate anyone you choose and you can also split your SIPP between various beneficiaries. If you haven\u2019t chosen a pension beneficiary then your pension trustees will be responsible for deciding what happens to your SIPP.<\/p> The person who receives your pension can choose whether to receive the pension as a lump sum or draw an income. The amount of tax due will depend on your age when you die and the type of pension.<\/p> When you inherit a SIPP you will usually be informed by the pension trustees.<\/p> You should take financial advice as you may have several options for how to access your pension. A financial adviser will be able to advise you on the best option for you and how to minimise your income tax bill.<\/p> Inheritance tax isn\u2019t usually due on an inherited pension as it is excluded from the taxable estate. This is a big potential tax saving compared with other inherited assets.<\/p> Inheritance tax on an estate is 40% on amounts over the nil rate band. A single person gets a tax-free nil rate band of \u00a3325,000 and they may get an extra \u00a3175,000 residence nil rate band if they own a property and pass it on to their children or grandchildren.<\/p> For example, Janet has never married and owns a house worth \u00a3600,000 and has a pension pot she hasn\u2019t used of \u00a3200,000. She dies and passes her estate to her son. The taxable estate is only \u00a3600,000 as the pension is excluded. Janet has a nil rate band of \u00a3500,000 (\u00a3325,000 + \u00a3175,000). \u00a3100,000 of her estate will be taxed at 40% so there will be \u00a340,000 inheritance tax to pay.<\/p> Inheritance tax may be due on a pension in certain rare circumstances, for example when the deceased made changes to their scheme within 2 years of death. That\u2019s why it\u2019s a good idea for executors to take professional advice to make sure all tax liabilities are paid.<\/p> Income tax may be due on an inherited pension, depending on the age of the deceased person and the type of pension scheme.<\/p> If the pension owner was under 75 when they died you may have to pay income tax if the following applies:<\/p> If the pension owner died when they were over 75 then you may have to pay income tax on your pension income.<\/p> Rules for income tax on an inherited pension are complex so it\u2019s a good idea to get financial advice. How you draw a pension may affect the tax payable.<\/p> Inheritance tax isn\u2019t usually due on an inherited pension as it is excluded from the taxable estate. This is a big potential tax saving compared with other inherited assets. Inheritance tax of 40% is charged on the taxable portion of some bigger estates.<\/p> You should get professional advice from a solicitor or financial adviser if you inherit a pension. They will make sure that any tax is paid in full and on time. If you don\u2019t pay any inheritance tax or income tax owed then you or the executors of the estate may be liable in the future.<\/p> Your SIPP allows you to pass on any unused pension when you die. This is usually free of inheritance tax and is often free from income tax if you die before you are 75 years old.<\/p> When you buy an annuity many providers offer a guaranteed lump sum if you die within 5 to 10 years of buying the annuity. This is usually paid tax free if you die before you are 75, but will attract income tax if you die after you are 75 years old.<\/p> If you have bought an annuity then the rules will be set out in your terms and conditions. Some annuities<\/a> stop at death and others pay out an income or a lump sum to a survivor. You should take financial advice to see if inheritance tax is due on your annuity. It will depend on the type of pension scheme and if the pension owner was over 75 when they died.<\/p> Under the new SIPP inheritance rules you may be able to inherit a pension without having to pay any tax if the pension owner dies before they are 75 and the funds are transferred or designated within 2 years.<\/p> Inheritance tax and income tax may still be due in certain circumstances so you should get financial advice.<\/p>What happens to my SIPP when I die?<\/h3>
What happens when I inherit a SIPP?<\/h3>
How much is SIPP inheritance tax?<\/h3>
What about income tax?<\/h3>
How much is SIPP inheritance tax?<\/h3>
What if my SIPP is not taxed, can those benefiting be at fault?<\/h3>
Does my SIPP have any death benefits?<\/h3>
Is my pension protection lump sum tax free?<\/h3>
What are the SIPP inheritance tax rules if I have taken an annuity?<\/h3>
What are the new SIPP inheritance rules?<\/h3>
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