What happens to my Self-Invested Personal Pension when I die? By Senior Consultant Chad Atwal

Frequently, I am asked about death benefits and Self Invested Personal Pensions (SIPPs). I detail a few pointers below and recommend you contact your adviser if you require further information on this area.

What happens to my SIPP if I die?
Death benefits can be paid to beneficiaries as a lump sum or used to generate an income through drawdown or by the purchase of an annuity.

Who are my beneficiaries?
Frequently, we note that SIPPs do not have a death benefit nomination form attached to them. We strongly recommend you complete a death benefit nomination form as this will advise your scheme administrator as to whom you would like benefits payable to in the event of your death.  The nomination is not usually legally binding but it tells your provider your wishes, which they must consider prior to allocating the death benefits.

Who can I nominate?
You can nominate whoever you like to receive your benefits on your death, which can also be split among several beneficiaries. These could be your spouse, children or grandchildren or you can nominate someone unrelated to you if you wish. You can also leave some, or all, of your SIPP to charity.

How are death benefits paid?
Beneficiaries of your pension will normally have the choice of taking the pension fund as a lump sum or leaving the fund invested and using it to provide an income. We suggest a beneficiary gets advice prior to deciding the best course of action to avoid any costly mistakes.

If they choose to leave the pension fund invested, they can take income as and when required. Any funds left invested will continue to benefit from being in a tax-advantaged pension wrapper.

What about tax?
This can be complex, but in summary, on death before age 75, the death benefits are normally paid tax free regardless of whether you have taken benefits from your pension or not.
Beyond age 75, any lump sum or income payments to beneficiaries will be liable for income tax at their own standard rates on any payments made.

Death benefit lump sums are usually free of Inheritance Tax (IHT) but can be subject to IHT in certain instances. HM Revenue & Customs reserve the right to subject a pension fund to an IHT charge if they feel it has been used for tax avoidance purposes.

What happens to the SIPP when the beneficiary dies?
If your beneficiary has not withdrawn the entire pension fund before their death, any remaining funds in the SIPP can be passed on to a further beneficiary. Your own beneficiary will be able to nominate their personal successors to whom they want the funds to go to following their death.

It is possible to have unlimited successors, so your pension fund could be passed on for generations, providing funds remain in the SIPP.  This can be a complex area and we strongly recommend you discuss these death benefits with your adviser to ensure you get the correct outcome for you.

The information in this article is correct as at 1 July 2019.