What Happens to My SIPP When I Die?

A Self-Invested Personal Pension (SIPP) is a type of personal pension scheme established in the United Kingdom. It allows individuals to choose and manage their own investments from a wide range of options, offering greater control over their retirement savings compared to traditional pensions. Understanding what happens to SIPP funds upon the holder’s death is important for both the SIPP holder, for planning purposes, and for potential beneficiaries.

Designating Your Beneficiaries

SIPP holders can nominate individuals or entities to receive their pension funds after their death. This is typically done through an “Expression of Wish” form. Completing this form guides the SIPP provider on the SIPP holder’s preferences for fund distribution.

An Expression of Wish is not legally binding like a will, but SIPP providers usually follow these wishes when distributing the funds. This structure allows for a more efficient transfer of wealth directly to nominated beneficiaries, bypassing the potentially lengthy and public probate process. Holders can name multiple beneficiaries, including individuals, trusts, or registered charities, and specify the percentage each should receive, offering flexibility in estate planning.

Tax Implications of Inherited SIPP Funds

The tax treatment of inherited SIPP funds depends significantly on the SIPP holder’s age at the time of death. SIPP savings are generally free from Inheritance Tax (IHT) in the UK.

If the SIPP holder dies before reaching age 75, any remaining funds can usually be passed to beneficiaries free of income tax. This applies whether the beneficiaries choose to take the money as a lump sum or use it to provide a beneficiary’s drawdown pension. For lump sum payments, this tax-free status is subject to the deceased’s available Lump Sum and Death Benefit Allowance (LSDBA). If the lump sum exceeds this allowance, the excess may be taxed at the beneficiary’s marginal income tax rate. For the funds to remain tax-free, they generally need to be designated and paid out or put into drawdown within two years of the SIPP provider being notified of the death.

When the SIPP holder dies on or after age 75, inherited funds are typically subject to income tax at the beneficiary’s marginal rate when withdrawn. This applies whether the beneficiary takes the funds as a lump sum or as income from a beneficiary’s drawdown pension. If the funds are paid to a trust rather than an individual beneficiary, a special lump sum death benefit charge of 45% may apply, although beneficiaries might be able to claim a credit for this tax.

Beneficiary Choices for Inherited SIPP Funds

Once a beneficiary is entitled to inherited SIPP funds, they have several distinct options for how to manage and access the money. These choices impact the flexibility of accessing funds and their ongoing tax treatment. The scheme administrator typically informs the beneficiary of these options.

One common choice is to take the entire fund as a single lump sum payment. This provides immediate access to the full amount. The tax implications of a lump sum withdrawal depend on the SIPP holder’s age at death, as detailed previously. For example, if the SIPP holder died after age 75, the lump sum would be taxed at the beneficiary’s marginal income tax rate.

Another option is to establish a beneficiary’s drawdown pension. This allows the funds to remain invested within the pension wrapper, with the beneficiary able to draw an income flexibly as needed. This option provides continued investment growth potential and control over the timing and amount of withdrawals. Withdrawals from a beneficiary’s drawdown pension are taxed according to the original SIPP holder’s age at death, mirroring the lump sum rules.

Beneficiaries may also choose to use the inherited SIPP funds to purchase an annuity. An annuity provides a guaranteed income stream, either for a fixed period or for the beneficiary’s lifetime. The income received from an annuity will be subject to the beneficiary’s marginal rate of income tax. In some cases, beneficiaries might be able to combine these approaches, for example, taking a partial lump sum and placing the remainder into drawdown.

Process for Accessing Inherited SIPP Funds

Accessing inherited SIPP funds involves a series of procedural steps that beneficiaries must follow to claim and utilize the benefits. The process begins with notifying the SIPP provider of the SIPP holder’s death. This initial contact is crucial for initiating the death benefits claim.

Following notification, the SIPP provider will typically request specific documentation to verify the death and the beneficiary’s identity. Essential documents usually include the original death certificate and proof of the beneficiary’s identity. Depending on the circumstances and the size of the fund, additional documents like probate or letters of administration may also be required, although SIPP funds often fall outside the probate process.

Beneficiaries will then need to complete specific forms provided by the SIPP administrator. These forms confirm their beneficiary status and state their chosen option for receiving the funds (lump sum, a beneficiary’s drawdown pension, or an annuity). The forms also gather necessary tax information to ensure correct processing. After the forms and documentation are submitted, the SIPP provider reviews the claim and processes the payment or sets up the chosen arrangement. This processing period can vary but typically involves a confirmation of the elected option and the subsequent transfer of funds or establishment of the new pension account. If a beneficiary drawdown account is chosen, the provider will then manage the ongoing investment choices and provide regular statements, similar to a regular pension.