What happens to your SIPP when you die?
For many people, their Pension is one of their largest assets for providing an income when they retire. As a result. we are often asked, what happens to my SIPP when I die.
In this article, we will cover the basic rules regarding the treatment of your SIPP funds when you die.
When you die, your pension funds will be paid to your nominated beneficiaries either as a lump sum or an ongoing pension income. Pension funds do not form part of your estate and therefore will not be subject to Inheritance Tax.
The way in which death benefits are treated varies depending on whether or not your death occurred before or after the age of 75 and whether or not you have started taking income from your pension.
Death Before Age 75
Uncrystallised Funds – The term ‘uncrystallised’, just means that you have not started taking any income from your pension in the form of ‘income drawdown’. In this scenario, the full fund can be paid to your nominated beneficiary, completely tax-free, either as a lump sum or as regular income in the form of an annuity or income drawdown.
Crystallised Funds – The term ‘Crystallised’ means that you have started taking income from the plan in the form of ‘income drawdown’. This could be regular income or even just a one-off lump sum. In this scenario, the full fund can also be passed to your nominated beneficiary, completely tax-free, as a lump sum or as a drawdown pension.
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Joint Life Annuity – If you are receiving annuity payments on a joint life basis, then your chosen beneficiaries can continue receiving the payments, tax-free.
Guaranteed Term Annuity
– As with a Joint Life Annuity, then your chosen beneficiaries can continue receiving the payments, tax-free.
Annuity Protection Lump-Sum Death Benefit – Your chosen beneficiary will receive a tax-free lump sum.
Death Before Age 75
In this scenario, regardless of the fund was crystallised or uncrystallised, when death occurs after the age of 75, your nominated beneficiary would be taxed on the amount they receive at their marginal income tax rate. For uncrystallised and crystallised funds, they can choose for the fund to be paid to them as a lump sum, an annuity or as a drawdown pension. For Joint life and Guaranteed Term Annuities, they will receive the annuity payments but taxed at their marginal rate. For the Annuity Protection Lump-Sum Death Benefit, they will receive a lump sum payment which is also taxed at their marginal rate.
Another big important factor to consider is the ‘2-year rule’.
The 2 Year Rule
In simple terms, if death occurs before the age of 75, in order for the beneficiary to receive a tax-free payment, a death claim must be made within 2 years of the date of death.
If the chosen beneficiary makes a death claim after this period, then the income or lump sum they receive will be taxed at their marginal income tax rate.
If you would like to talk to someone regarding rules surrounding pension death benefits, contact us today and a member of our team would be happy to help.
This article does not contain personal or financial advice. It is provided for general information only and does not take into account your personal objectives, financial situation or needs. IVCM is not authorized to provide you with any personal or financial advice.
If you require financial any advice then you must make sure that you obtain advice from a suitably qualified financial adviser.
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