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I had always understood that my Self-Invested Personal Pension (Sipp) contributions were held in trust and that the trustees had the power to decide to whom payments should be made after my death.
As a result, I signed an expression of wishes form to say who I would like to be the recipient, but I understood that the trustees were not required to comply with this.
As all of my pension contributions were made over seven years ago, does this mean they are exempt from the recent Budget proposal to add the pension pot to my estate for inheritance tax purposes?
I would appreciate your advice so I can consider my options.
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Inheritance tax: The last time I paid into my Sipp was over seven years ago and the trustees decide who gets it. How will budget changes affect me? (File image)
Steve Webb responds: Since the budget we have been inundated with questions about how the proposed changes to inheritance tax will affect different types of pensions.
It would be fair to say that there is still a lot we don’t know, especially as the proposal is currently subject to consultation and we are yet to see the detailed legislation.
Hopefully I can clarify some points that have caused confusion.
However, since I am not a lawyer and many details remain outstanding, the usual warning not to treat the information in my column as financial advice is particularly relevant.
The first thing to say is that the budget measures focus mainly on the ‘unspent’ balances of the ‘pot of money’ or defined contribution pensions, as they are known.
Other death payments, such as ‘death in service’ payments from defined benefit plans, may also be included in the future.
But I will focus here on the relatively simple example of unspent money sitting in a defined contribution pension.
(A full list of the different types of payments that may be covered is provided in Annex B of the government consultation. Inheritance tax on pensions: responsibility, declaration and payment.
From what we have heard so far, there is no reason to think that Sipps (Self-Invested Personal Pensions) will be excluded from the changes.
In fact, if the government *excluded* Sipps but included workplace pensions, this would create a huge loophole that would no doubt be widely used.
It raises the question of what counts as part of your “estate” and how the government can collect inheritance tax on something like a Sipp where the trustees decide who inherits the pension.
The answer lies in the fact that the word “goods” can be used to refer to two different things.
The gov.uk website on what to do when someone dies says that your estate is “the money, property and possessions of the person who died”; consult Dealing with the estate of someone who has died.
Meanwhile, a separate website, gov.uk, on inheritance tax says it is “a tax on the estate… of someone who has died”.
However, there are things that form part of your estate that are exempt from inheritance tax, and there are things that do not form part of your estate but will be subject to inheritance tax when the Budget changes come into force.
No wonder there is confusion.
To give an example, if you die and leave money in your Isa to your spouse, they will not have to pay inheritance on this amount because it is a transfer between spouses.
But the Isa is still part of the estate, and what happens to your Isa will be governed by the terms of any will.
> How much is the inheritance tax and who pays it?
By contrast, money from a trust-based personal pension or defined contribution occupational pension is not, until now, counted as part of your estate.
In particular, as you say, it has been the trustees’ decision (informed by their expression of wishes) that determines where the money goes, rather than their will.
From April 2027 it *will* still be the case that it is the trustees who decide who gets the money in a Sipp.
But the estate for inheritance tax purposes will now include the value of your pensions.
In short, the fact that the fate of your pension upon death is not determined by your will does not mean that the government cannot impose an inheritance tax on the value of that pension.
It also raises the issue of money contributed to a pension more than seven years ago.
The reference to seven years before death relates to the inheritance tax rule which says (in essence) that if you make a gift and then survive seven years, this money will no longer count towards your estate for inheritance tax purposes. inheritance.
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But it seems hard to believe that the government would decide that the money you paid into your Sipp seven years ago would be covered by this exemption.
In simple terms, the money in your Sipp is still your money and (once you have reached the normal minimum pension age) you can withdraw it at any time if you wish.
In fact, although the rules were written with different circumstances in mind, the Gov.uk guidance on inheritance and gift tax It specifically says: ‘If you give something away but still benefit from it… it will count towards the value of your estate.’
On that basis, it is unlikely to make any difference when you paid the money into your pension when HMRC comes to assess how much inheritance tax you should pay in the event of your death.
As many This is Money readers clearly feel strongly about these changes, I encourage you to share any concerns with your local MP if they will affect you in a particularly adverse way.
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