3 practical examples of how SIPP death benefits can be paid tax-efficiently
If you have a client with a SIPP, part of the advice you will provide will relate to what happens to the SIPP in the event of the client’s death.
It’s often a conversation that clients do not want to have. However, the tax advantages of SIPPs can be so beneficial to planning for a client’s future that it may pay (literally!) to consider this. It can ensure that a client can pass on assets as they wish.
Unfortunately, we deal with the distribution of death benefits from SIPPs more often than we would like. However, what this does give us is lots of experience of the flexibility offered by HMRC’s guidance on how death benefits can be distributed.
We have recently looked at 10 of the most common questions advisers and clients ask us about SIPPs and death benefits. Now, read some case studies which show this flexibility in practice.
Death aged before 75, multiple beneficiaries
Marty died aged 72 with a SIPP valued at £300,000. It was invested in a managed portfolio.
He was single at the time of his death and had nominated his two children, Charlotte and Jonah, as the majority beneficiaries to his SIPP (49% each) and his two grandchildren, Erin and Ruth, as minority beneficiaries (1% each).
As Marty died before the age of 75, any distributions from the SIPP would be tax-free.
However, just because this is the case, it doesn’t necessarily mean that distributing the proceeds from the SIPP is the right course of action for the beneficiaries.
Instead, they could keep the benefits within a structure of a SIPP where they would continue to grow free of any Capital Gains Tax. Additionally, yields on investment would not be subject to Income Tax and the benefits would remain outside of the beneficiaries’ estates in the event of their deaths.
Jonah was entitled to £147,000 of Marty’s SIPP. Jonah elected to receive a £47,000 tax-free death benefit lump sum, which was paid to him by the SIPP provider with the balance left in the SIPP.
This was invested in a portfolio on his behalf by his financial planner. Jonah also completed a successor’s nomination form, so it is clear as to who these benefits should be paid to in the event of Jonah’s death.
Charlotte decided that she wanted to forego her entitlement to the benefits left to her by Marty and instead pass these onto her children, Erin and Ruth.
So, as well as the £3,000 both Erin and Ruth were left directly by Marty, Charlotte’s decision to pass the benefits she was nominated to receive to Erin and Ruth means that both grandchildren received a further £73,500 each (half of the 49% Marty had left to Charlotte). Importantly, this would not have been possible without Marty’s original nomination.
As both Erin and Ruth are minors, it was decided to keep the full amounts within SIPPs on their behalf, to be managed on a long-term growth basis.
However, these benefits would still continue to be tax-free death benefit lump sums to Erin and Ruth should they ever decided to draw these in the future.
Death after age 75, managing distribution
Liz had accumulated a SIPP worth £400,000 by the time she died aged 79. She had been in flexi-access drawdown at the time of her death and had been receiving £24,000 each year as income, paid monthly.
Her sole nominated beneficiary was her husband, Phil. Phil also had a SIPP and was receiving flexi-access drawdown of £36,000 a year, paid monthly. As well as his flexi-access drawdown, Phil also received £10,000 a year in rental income, giving him a total income of £46,000 a year.
As Liz was over 75 when she died, any benefits Phil draws from the SIPP will subject to tax at Phil’s marginal rate.
Phil’s income situation has not really changed as a result of Liz’s death. He still has a small amount of his basic-rate tax threshold which he can use.
However, it does not matter whether the small additional amount he can draw at basic-rate Income Tax is drawn from his own SIPP as flexi-access drawdown or the benefits he has been nominated beneficiary for from Liz’s SIPP.
The key thing for Phil is to ensure that any withdrawals stay within the 20% tax bracket. His financial planner continues to manage the investments within both SIPPs, as previously agreed.
Using SIPPs as part of intergenerational planning
Clive and Susan Jones have two SIPPs which hold the commercial property from which the family business operates.
The assets in the SIPPs are owned on a 60/40 basis. Their children, Tom and Alexandra, are directors of the company but do not have any involvement with the property or the SIPPs.
The property is worth £300,000 and there is no mortgage. Clive and Susan also have an investment portfolio within their SIPPs valued at £100,000 each.
After taking their pension commencement lump sum, and discussions with their financial adviser, they decide to take the rental proceeds received by the SIPP as income. The annual rental value is £25,000 meaning that Clive receives £15,000 (60%) and Susan receives £10,000 (40%) as drawdown income from their SIPPs.
They are taking monthly income which is taxed at 20% as they are both basic-rate taxpayers.
Susan passes away aged 67
Susan nominated Clive as the sole beneficiary to her SIPP. Rather than take the benefits out of the SIPP as a lump sum, Clive elects to retain these in the SIPP. This is mainly due to the fact that the majority asset in Susan’s SIPP is the commercial property which the business is trading from.
What this means is that Clive is now the sole beneficiary to the property and the rental income. At the next meeting with the adviser, they decide to stop income withdrawals from Clive’s SIPP as he is now able to take benefits free from tax from Susan’s entitlement.
Upon Susan’s death, Clive updates his death benefit nomination details for his SIPP. He nominates Tom and Alexandra to be the equal beneficiaries to his SIPP, as well as the successors to the benefits originally held by Susan.
A few years later, Clive dies aged 72
In accordance with the death benefit nominations completed after Susan’s death, Clive’s SIPP and the benefits he held in respect of Susan’s original SIPP, are split equally between the two children.
Outside of the SIPP, Tom (age 35) and Alexandra (age 32) now become directors of the company. Their priority is to ensure that the business continues to have premises from which to operate.
When it comes to the payment of the death benefits, both children establish a SIPP into which their 50% entitlement to Clive and Susan’s SIPPs is paid.
Effectively, Tom and Alexandra have each retained 50% of the property and investment portfolio within the tax-efficient pension wrapper.
Both Tom and Alexandra decide they would like to receive £1,000 a month from their SIPPs. As Clive passed away before his 75th birthday, these withdrawals can be paid to Tom and Alexandra tax-free.
Two years later, Tom decides that he would like to receive a £30,000 lump sum from the pension to put towards a new house purchase. Again, this can be deducted tax-free from either the nominated beneficiary or successor benefits (from the non-property assets in the SIPP).
Get in touch
If you have a client for which a SIPP could be beneficial, or if you’d like to discuss your client’s specific scenario with us, please get in touch. Email firstname.lastname@example.org or call 01438 747151.