I have £300,000 in a self-invested personal pension which I don’t need for my living expenses as I have final salary pension income and Isas that I can draw on for additional tax-free income.
I am a widow with six grandchildren and I am considering leaving this pension fund to them, but how does this work if they wanted to take money from it after I die?
Would they have to wait until they turned 57 to withdraw money from the pension, as people normally would, or could they withdraw money earlier?
If they could withdraw the money sooner, would they have to withdraw it all at once or could they leave it there and withdraw it whenever they wanted?
I’ve been thinking this would be the ideal way to leave everyone some money for a house deposit, but I don’t want them to wait until they’re 57 to do it. With luck, they would be able to buy their own house before they were in their fifties. Anonymous, via email
A helping hand: First-time buyers are increasingly relying on family members to help them access housing
Harvey Dorset from This is Money answers: Being in a position where you can afford to keep your grandchildren’s pension intact is ideal if you want them to benefit from your savings in the potentially most tax-efficient way.
Sipps, as personal investment pensions are known, are a popular form of personal pension that allows people to invest within a pension ‘wrapper’, giving them a lot of control over the investments they hold.
Many people will have a Sipp in addition to a pension fund set up with their employer, which may be a defined contribution plan or a defined benefit plan.
Those whose employer pensions are good enough to fund their retirement may not need to use their Sipp to live on.
As you mention, you hope that your Sipp can help your grandchildren get up the housing ladder in the coming years and as such it wouldn’t be of much use if they can’t access it until they are 57.
The good news is that your grandchildren will not need to turn 57 to be able to withdraw money from an inherited pension, as our experts explain below, inherited pensions can be withdrawn at any time.
Additionally, this could be beneficial from an inheritance tax perspective, although it depends on whether someone dies before or after age 75 and how much their beneficiary earns.
If someone dies before age 75, then they can inherit a tax-free pension, although it should be noted that there are calls to end this pension inheritance benefit.
If someone dies after age 75, a pension fund is excluded from net inheritance tax, but income tax must be paid on any withdrawals made by its beneficiaries. This means they could pay taxes of 20 percent, 40 percent, or 45 percent.
This means that if you die after age 75, it is probably more tax efficient for your beneficiaries to gradually withdraw money from an inherited pension fund. If you split £300,000 equally and the grandchildren each received £50,000 as a lump sum and had other income, then they are likely to exceed the higher rate tax threshold of £50,270.
I spoke with two experts about the best way to leave your money to your grandchildren.
Inheriting a pension: II’s Craig Rickmain explains that inherited Sipps can be used at any age.
Craig Rickman, personal finance expert at Interactive Investor, responds: First of all, it’s great that you’re planning ahead. Weighing up how you would like your Sipp to be distributed upon death can be a bit morbid, but it is a really important exercise.
It can reduce friction between heirs, potentially save them some taxes, and give you peace of mind that your hard-earned savings will pass into the right hands.
However, there are a few things to analyze here. As you may have discovered, the pensions landscape can be quite complicated.
So what are the things you need to know?
Before doing anything else, check that you have completed an expression of wish and nomination form. This tells your Sipp provider who you would like to inherit his pension in the event of his death.
In this case, you would name your six grandchildren, selecting what percentage each receives. Please note that the funds do not have to be divided equally.
Although your wishes are not binding (your Sipp provider ultimately decides how the funds are distributed), they are taken into account. It is also important to update this form if your circumstances or intentions change at any time in the future, which you can do at any time.
When it comes to inheriting Sipp death benefits, beneficiaries typically have two options. They can receive the money as a single lump sum or opt for something called beneficiary withdrawal.
In the latter case, the money remains in a pension package, thus retaining the benefits of tax-free earnings and dividends, and the beneficiary has the option to make withdrawals whenever they wish.
Unlike standard withdrawal, there are no age restrictions on withdrawals, so even those below the minimum retirement age of 55 (which will reach 57 in 2028) can access the money.
So how does the tax on pension funds inherited upon death work? Although pensions typically avoid inheritance tax, your beneficiaries may pay income tax, although this depends on when you die.
If you die before age 75, your grandchildren can receive your Sipp funds income tax free, regardless of whether they receive a lump sum or make withdrawals from a beneficiary retirement plan.
Regarding lump sum payments, please note that a two-year rule applies. This means that the money must be paid within two years of the plan administrator being informed of your death. If the process takes more than two years, the money could be subject to taxes.
If you die after age 75, any withdrawals or lump sum payments will be taxed at the beneficiary’s marginal rate in the tax year in question.
Under the current regime, everything within the base rate tax band is taxed at 20 per cent, while those that fall within the higher rate or additional rate brackets are taxed at 40 per cent or 45 per cent. cent, respectively.
It might also be worth considering another option. If you would like the money to go toward a home deposit for your grandchildren, they may benefit from receiving the funds sooner.
Therefore, you could gift them the money while you are still alive, allowing them to enjoy the money now or in the near future. This would involve making withdrawals from your Sipp and then passing the money on to your grandchildren.
This approach has some tax implications. On any Sipp withdrawal, she will pay income tax at her marginal rate, which may reduce what can be passed on to her grandchildren. What’s more, gifts may be subject to inheritance tax if you die within seven years of the date the gifts were made.
So if you’re happy for your grandchildren to wait until after you die to inherit your Sipp, keeping the money intact inside the pension wrapper should be the best course of action.
Tax benefits: Michelle Holgate says pensions are not usually subject to inheritance tax
Michelle Holgate, financial planner at wealth manager RBC Brewin Dolphin, said: With an inherited defined contribution pension fund, beneficiaries can draw on the funds at any age, as the payment of death benefits is not linked to their own minimum retirement age.
Subject to specific scheme rules, they often have the ability to take the money as a lump sum directly from the deceased’s pension, elect to have the funds paid into a pension in their own name, and withdraw income (which can be done at any age) or even buy an annuity.
If you die before age 75, beneficiaries can generally withdraw the money from the inherited pension income tax-free.
There is a two-year window within which funds must be designated or pensions will potentially be subject to tax. A person has a lump sum and death benefit allowance and if it is exceeded the excess will be taxable.
The standard allowance is currently £1,073,100. However, if you die after age 75, each of the beneficiaries will be taxed at their highest marginal income tax rate on the withdrawals they make.
Leaving money through a pension can be tax efficient, as pension plans generally sit outside a person’s estate for inheritance tax purposes.
As a pension is not part of your estate, it is not passed on under your will and it is therefore important that you complete an expression of wish form to inform the trustees of the pension who you would like to benefit from the funds and how. proportions.
Everyone’s circumstances are different and pension rules vary from plan to plan. I therefore strongly recommend seeking financial advice to ensure that your pension plans work as efficiently as possible for you during your lifetime and are set up correctly to pass on to your beneficiaries in the way you would wish in the event of your death.
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