Thinking about what happens to your Self‑Invested Personal Pension (SIPP) when you die is an important part of planning for the future. The good news is that SIPPs are designed to be passed on efficiently, often with significant tax advantages. Here’s what you need to know.
Your SIPP Passes to Your Beneficiaries
Any money remaining in your SIPP when you die will normally pass to your chosen beneficiaries. These can be anyone you nominate such as family, friends, or even a charity and you can usually update these nominations at any time. Although pension providers are not legally bound by your nomination, it strongly guides their decision.
If you haven’t made a nomination, trustees will decide who receives the benefits, which can delay payment. Keeping nominations up to date ensures your SIPP is passed on according to your wishes.
Is Inheritance Tax Payable on a SIPP?
Typically, SIPPs are not included as part of your estate for inheritance tax (IHT). This means passing on your pension is usually inheritance‑tax‑free.
However, the UK government has announced proposed changes that may include most private pensions within estates for IHT from April 2027, although these changes are still under consultation. This means current rules may not remain the same in future years.
Tax Treatment for Your Beneficiaries
What tax your beneficiaries pay depends largely on your age at the time of death.
If You Die Before Age 75
- Beneficiaries can usually withdraw the money tax-free, as a lump sum or income, as long as the pension is designated to them within two years of your death.
- Payments count towards their Lump Sum and Death Benefit Allowance (LSDBA), and amounts above this allowance are taxed as income.
If You Die After Age 75
- Withdrawals by beneficiaries are usually taxed at their marginal rate of income tax.
- Lump-sum payments to trusts may be taxed at 45%, though payments to charities can be tax‑free if no dependants remain.
How Your Beneficiaries Can Receive the Money
Most SIPP providers offer a range of options, including:
- A Lump Sum Payment
A single tax‑free or taxable lump sum (depending on your age and allowances).
- Income Drawdown
Beneficiaries can move the pot into a beneficiary drawdown account and take income as needed.
- Tax‑free if you die before age 75 (and designated in time).
- Taxable if you die after 75.
- Annuity Purchase
Some may choose to use the funds to buy an annuity that pays a guaranteed income.
Your provider will outline which options are available under your specific SIPP plan.
Key Points to Remember
- You can nominate anyone as a beneficiary, and you should review nominations regularly.
- SIPPs are normally free from inheritance tax, at least until potential rule changes in 2027.
- Tax on withdrawals depends on whether you die before or after age 75.
- Benefits must usually be designated within two years to retain certain tax advantages.
- Your remaining Lump Sum and Death Benefit Allowance (LSDBA) affects how much can be taken tax‑free.
