Understanding Self-Invested Personal Pensions (SIPPs) and inheritance tax can be a bit overwhelming, especially if you’re new to financial jargon.
This guide aims to explain everything you need to know about SIPP inheritance tax in simple, easy-to-understand terms.
- Is a SIPP subject to inheritance tax?
- How is a SIPP taxed on death?
- What happens to my SIPP if I die before 55?
- What investments are not subject to Inheritance Tax?
- Are withdrawals from an inherited SIPP tax-free?
- Can a SIPP be passed on after death?
- What is pension crystallisation at 75?
- I have inherited a SIPP: what next?
- Advice on an Inherited SIPP
- SIPP Inheritance Tax FAQs
Is a SIPP subject to inheritance tax?
A SIPP is not subject to inheritance tax (IHT), but your beneficiaries may have to pay income tax when withdrawing an inherited SIPP if you die after the age of 75.
If you die before the age of 75, they can withdraw it tax-free.
IHT is a tax on the value of a person’s estate when they die. Your estate includes assets such as property, cash, and personal belongings. Your estate has a nil-rate IHT band of £325,000, and anything over that value is taxed at 40%. However, your SIPP does not count towards this as it doesn’t count as part of your estate.
Instead, it’s taxed as income if you die after the age of 75, as explained above.
How is a SIPP taxed on death?
When you pass away, the way your SIPP is taxed depends on your age at the time of death and how your beneficiaries choose to access the funds.
Here’s a breakdown of the tax implications based on your age:
Death before age 75
If you die before reaching the age of 75, any remaining funds in your SIPP can be passed on to your beneficiaries completely tax-free. This applies whether they take the money as a lump sum or as drawdown (withdrawing a variable income from the pension).
Death after age 75
If you die after the age of 75, the situation is slightly different. Your beneficiaries will need to pay income tax on any withdrawals they make from your SIPP. This tax will be based on their marginal income tax rate, which could be 20%, 40%, or 45% depending on their total taxable income.
Here’s a table with the current income tax brackets:
|Income Tax Band
|Taxable Income (£)
|Income Tax Rate (%)
|Up to 12,570
|12,571 to 50,270
|50,271 to 125,140
Please note that these rates apply to England, Wales, and Northern Ireland. Scotland has slightly different income tax bands and rates.
What happens to my SIPP if I die before 55?
If you die before turning 55, the tax treatment of your SIPP is the same as if you died before the age of 75.
This means that any funds remaining in your SIPP can be passed on to your beneficiaries tax-free, regardless of whether they take the money as a lump sum, drawdown, or annuity.
Note that if you have a terminal illness before you’re at pension age, you may be allowed by HMRC to take your pension before you turn 55.
What investments are not subject to Inheritance Tax?
While SIPPs are not subject to inheritance tax, it’s still essential to understand how other investments might be impacted. There are certain investments that can help reduce your inheritance tax exposure. These include:
Shares in companies listed on the Alternative Investment Market (AIM) can be exempt from IHT if held for at least two years. The AIM is a sub-market of the London Stock Exchange, which hosts smaller, growing companies.
Business Property Relief (BPR) investments
BPR-qualifying investments, such as shares in unquoted trading companies or certain types of property, can be exempt from IHT if held for at least two years. This relief is designed to encourage investment in smaller, unquoted trading companies that may be higher risk but contribute to economic growth.
UK government bonds, or gilts, are generally exempt from IHT. These bonds are considered low-risk investments, as they are backed by the UK government.
Are withdrawals from an inherited SIPP tax-free?
Withdrawals from an inherited SIPP are tax-free if the original account holder died before age 75. However, if the account holder died after turning 75, withdrawals will be taxed at the beneficiary’s marginal income tax rate, which depends on their total income.
Can a SIPP be passed on after death?
Yes, a SIPP can be passed on to beneficiaries after the account holder’s death.
You can nominate the beneficiaries of your SIPP by completing an Expression of Wish form or Beneficiary Nomination form with your SIPP provider.
You can also allocate set percentages for each beneficiary.
The funds can be taken as a lump sum, through drawdown, or as an annuity, depending on the beneficiary’s preferences and the tax implications.
It’s important to note that the tax treatment of inherited SIPPs depends on the age of the original account holder at the time of death, as discussed earlier in this article.
What is pension crystallisation at 75?
Pension crystallisation at 75 was known as the process of testing your pension funds against your lifetime allowance (LTA) at age 75.
However, as of April 2023, the lifetime allowance in the UK has been scrapped, meaning you are now free to save as much as you want into your SIPP and total pensions!
The old test determined whether any tax charges applied if your pension funds exceeded the LTA. If the value of your pension was above the LTA, you’d be subject to a tax charge on the excess amount.
I have inherited a SIPP: what next?
If you’ve inherited a SIPP, you have several options for accessing the funds:
Taking the funds as a lump sum
You can withdraw the entire amount in one go, but be aware that if the original account holder died after turning 75, the withdrawal will be taxed at your marginal income tax rate.
You can choose to take income from the inherited SIPP through drawdown, allowing you to control the amount and timing of your withdrawals.
Again, if the original account holder died after turning 75, withdrawals will be taxed at your marginal income tax rate (and the income will be added to any personal income you earn, so it could push you up into a higher bracket.
You can use the inherited SIPP to purchase an annuity, which will provide you with a regular income for life or a fixed period. The income from the annuity will be taxed at your marginal income tax rate.
Additionally, it’s essential to inform the SIPP provider of the death and provide any required documentation, such as a death certificate. The SIPP provider will guide you through the process and help you understand the options available to you.
Remember, consulting a SIPP advisor can help you navigate the complexities of financial planning and ensure you make the best decisions for your unique circumstances.
Advice on an Inherited SIPP
If you’ve inherited a SIPP and you’d like financial advice on what do to next, we recommend booking an initial consultation with one of our advisers.
We specialise in providing financial advice for SIPPs, especially inherited SIPPs that were previously being managed by a partner or family member.
It’s a very big financial decision in terms of how to invest an inherited SIPP, whether to consolidate it with your own pension, and how it impacts your retirement plans etc., and getting financial advice takes all the guesswork out of the equation.
Book a free consultation below for a friendly chat to see if we can help.
SIPP Inheritance Tax FAQs
Is a SIPP part of your estate?
No, a SIPP is not considered part of your estate for inheritance tax purposes. This means that the value of your SIPP can be passed on to your beneficiaries without being subject to inheritance tax.
However, they may need to pay income tax on withdrawals from the inherited SIPP if you die before the age of 75.
Does an inherited SIPP count towards Lifetime Allowance?
No, an inherited SIPP does not count towards the beneficiary’s lifetime allowance (LTA).
The LTA is only applied to the original account holder’s pension funds. The lifetime allowance has also now been scrapped as of April 2023, so you don’t need to worry!
Is a SIPP part of probate?
As a SIPP is not considered part of your estate, it is not subject to probate.
This means that the SIPP can be passed on to your beneficiaries more quickly and without the delays often associated with the probate process.
Probate is the legal process of dealing with someone’s estate after they die, which includes settling debts and distributing assets according to their will or the rules of intestacy if no will exists.
Does HMRC check Inheritance Tax?
Yes, HM Revenue and Customs (HMRC) is responsible for administering inheritance tax and ensuring that it is paid correctly.
Executors of an estate are required to submit an inheritance tax return to HMRC, and the tax authorities may conduct investigations or audits to ensure that the correct amount of tax has been paid.
Remember, it’s always a good idea to consult a financial advisor to help you navigate the complexities of financial planning and ensure you make the best decisions for your unique circumstances.