Self-Invested Personal Pensions: What Happens After You Die

A Self-Invested Personal Pension (Sipp) is a pension scheme that gives you more control over your retirement savings. It’s a retirement savings account where you get to choose your investments – a much broader range than typical private pension schemes offer. It also comes with tax advantages; these benefits are a key reason why many people opt for Sipps.

One key appeal of the Sipp is that it can be bequeathed to your chosen beneficiaries when you die. So, even if you don’t live long enough to fully enjoy your retirement savings, you can rest assured that your spouse, children, or any other loved ones, can get to benefit from the funds you’ve diligently saved over your lifetime. An article in Inews looks at how that works.

Transferring your Sipp: Naming a Beneficiary

Transferring the Sipp after your death requires naming a beneficiary, which is typically done during the setup of your account. Companies that offer Sipp products provide an option to nominate one or more beneficiaries. Most individuals usually select their children or spouse.

If you can’t remember nominating a beneficiary when you initially established the account, it’s crucial to reach out to your Sipp provider for confirmation. If you leave no specified beneficiary, the provider will be left with the duty of deciding who gets the funds after your demise. This may not adhere to your originally intended plans.

Inheritance Tax and Sipps

Inheritance tax is typically a huge concern when passing on wealth. However, in the case of Sipps, they’re generally not seen as part of your estate and are therefore not subject to any inheritance tax. Still, there’s a caveat; your heirs need to consider other tax liabilities such as income tax.

Ishaan Sethi, a product lead for wealth at smart money app Plum comments, “Most often, beneficiaries can receive the money free from inheritance tax”. He further explains that if you pass away before you turn 75, beneficiaries can make withdrawals without tax implications, provided the amount doesn’t exceed the lifetime allowance for pensions which is currently set at £1,073,100.

On the contrary, if you happen to die when you are 75 or older, the withdrawals will be treated as part of the beneficiary’s income, and will be taxed on that basis.

Future Pension Rule Changes and Inheritance

While the current rules seem straightforward, it’s worth noting that from next year the lifetime allowance will be substituted with the lump sum and death benefit allowance pegged at the same rate.

In keeping up with the ongoing pension rules review, the government is contemplating changing these rules too. They propose that beneficiaries of those who die before turning 75 will no longer be exempted from income tax. Though no final decision has been reached, change is always plausible in tax policies.

Given these possible changes, Sethi recommends holders of Sipps to seek “a degree of flexibility” when choosing their retirement savings product. It’s also crucial to consider other factors like the fees charged, and the simplicity of making deposits and withdrawals.

By planning carefully and understanding the rules around Sipps, you can ensure that you maximise your retirement savings and make the process easier for your beneficiaries when the time comes.