Some UK searchers look up 'SIP inheritance rules' when they mean SIPP. SIP usually means Share Incentive Plan or Systematic Investment Plan and follows different rules on death. This article covers SIPP inheritance rules, the way a Self-Invested Personal Pension passes to beneficiaries under UK pension legislation, and the recent changes from April 2024.

Summary

A SIPP can pass to nominated beneficiaries on death, with tax treatment depending on whether the saver died before or after age 75. Under current rules, SIPPs typically sit outside the estate for Inheritance Tax purposes. The lump sum and death benefit allowance caps tax-free death lump sums, and the position is under policy review.

Key Takeaways

  • SIPPs can be passed to nominated beneficiaries via the scheme administrator's discretion.
  • Death before age 75 generally means tax-free benefits to beneficiaries, subject to the LSDBA.
  • Death after age 75 means beneficiaries pay income tax at their marginal rate on withdrawals.
  • Beneficiaries can usually choose between a lump sum and beneficiary drawdown.
  • SIPPs are generally outside the saver's estate for UK inheritance tax under current rules.
  • Expression of wish forms guide the administrator and should be kept up to date.
  • Government policy on pension inheritance tax treatment has been under review.

Introduction

Pension inheritance rules are some of the most complex parts of UK Retirement Planning and have been changed several times in the past decade. For SIPP holders, understanding what happens to the pot on death is important not just for the saver but for their nominated beneficiaries.

This article explains how SIPP inheritance works under current UK rules, including the difference between dying before and after age 75, the lump sum and death benefit allowance introduced from April 2024, the role of the expression of wish form and the position of inheritance tax. It is intended as general information for UK readers.

Pension inheritance has been a focus of government consultation in recent years, and the position may evolve further. UK readers planning around pension inheritance should check the latest position with HMRC and a regulated adviser before relying on any rules described here.

How a SIPP Passes on Death

When a SIPP holder dies, the scheme administrator typically has discretion to pay the remaining funds to one or more beneficiaries. This discretion is what keeps the SIPP outside the saver's estate for inheritance tax purposes under current UK rules.

The administrator is guided by the saver's expression of wish (or nomination) form, which sets out who the saver would like to benefit. The administrator is not legally bound by the expression of wish but usually follows it in the absence of compelling reasons not to.

Death Before Age 75

If the SIPP holder dies before age 75, beneficiaries can generally receive the pension free of UK income tax, subject to the lump sum and death benefit allowance (standard £1,073,100 from 6 April 2024). Benefits can be taken as a lump sum or drawn as a beneficiary's drawdown pension.

Beneficiary's drawdown allows the recipient to leave the inherited pot invested and draw income flexibly, with no UK income tax on withdrawals (subject to the LSDBA). This can be a tax-efficient way to pass Wealth to the next generation, although care is needed around the LSDBA cap.

Death After Age 75

If the SIPP holder dies after age 75, beneficiaries pay income tax at their marginal rate on any withdrawals from the inherited pension. The fund itself is still passed without an upfront inheritance tax charge under current rules, but the tax comes when the money is drawn.

This makes the timing and form of withdrawals important. A beneficiary in a lower Tax Bracket may take income gradually to avoid pushing themselves into a higher band. A beneficiary already in the additional-rate band may prefer to spread withdrawals over years.

The Lump Sum and Death Benefit Allowance

From 6 April 2024, the lump sum and death benefit allowance (LSDBA) replaced the lifetime allowance charge. The standard LSDBA is £1,073,100, covering tax-free pension commencement lump sums in life and most lump sum death benefits. Transitional protections may give some savers a higher limit.

Death lump sums above the LSDBA are taxed on the recipient at their marginal income tax rate, regardless of whether the saver died before or after 75. This is a key change from the old lifetime allowance regime and affects estate planning for larger pensions.

Inheritance Tax Position

Under current UK rules, SIPPs are typically outside the saver's estate for inheritance tax (IHT) purposes because of the scheme administrator's discretion. This has historically made pensions an efficient way to pass wealth across generations.

Government policy on pension IHT treatment has been under consultation, with proposals to bring unused pension funds within IHT from a future effective date. UK readers should check the latest position before relying on the IHT treatment of SIPPs.

Choosing Beneficiaries

Most SIPP providers allow the saver to nominate any individual or charity as a beneficiary. Spouses, civil partners, children, grandchildren and wider family are all common nominations. Some savers also nominate trusts or, less commonly, companies.

Reviewing the expression of wish after major life events - marriage, divorce, the birth of a child, the death of a beneficiary - is essential. An out-of-date nomination can lead to outcomes the saver would not have wanted.

Tax for the Beneficiary

Beneficiary's drawdown income from a SIPP inherited after the saver's death after age 75 is taxed as the beneficiary's income, even if they are a minor. Trusts and complex beneficiary arrangements have their own tax treatment that may differ.

Beneficiaries should think about the interaction with their own income, pensions and savings before making large withdrawals. Drawing the entire inherited pot in one year is rarely tax-efficient.

Successor Pensions and Multi-Generational Planning

If a beneficiary later dies with funds still in beneficiary's drawdown, those funds can typically be passed on again to a 'successor'. The tax treatment of successor benefits depends on the age at which the original saver and the beneficiary died, which can become technical across generations. Some families use SIPPs as part of a multi-generational wealth plan, although the rules require careful tracking.

Specialist regulated advice and, where the estate is substantial, input from a solicitor experienced in pensions and estate planning can help set up nominations that achieve the saver's long-term intent. This is particularly relevant for blended families, Business owners and those with substantial Assets outside the pension.

Practical Steps for SIPP Holders

Reviewing the expression of wish at least annually, after every major life event and after any change in pension rules helps keep the plan up to date. Keeping a record of the form and confirming the SIPP provider has the latest version on file is a simple but valuable check.

Coordinating the SIPP with the saver's will and any other pensions is also important. The expression of wish does not override the will, but inconsistencies can cause confusion for the family and the administrator. A regulated adviser or solicitor can help align the different documents.

How Recent Reforms Affect Pension Inheritance

The abolition of the lifetime allowance from 6 April 2024 and the introduction of the lump sum and death benefit allowance reshaped the way death benefits are taxed for higher-value pensions. For most savers, the new framework simplifies planning around lump sums, but for very large pensions the LSDBA has to be tracked carefully.

The Autumn Statement 2024 outlined the government's intention to bring unused pension funds within the scope of inheritance tax from a future effective date. Detailed consultation has been undertaken, and the timing and shape of the rules continue to evolve. UK readers planning around pension inheritance should monitor HMRC announcements and consider speaking to a regulated adviser if rules change in a way that affects their plans.

Where the planned IHT inclusion does take effect, it is likely to change the relative attractiveness of leaving funds inside a SIPP versus drawing them down during life. As with all tax-driven planning, decisions should be based on circumstances and not solely on the current rules, which may shift again.

HMRC and FCA Context

HMRC sets the rules on pension death benefits, the LSDBA and the IHT treatment of pensions. The Pensions Tax Manual contains detailed guidance, including the treatment of nominees, successors and dependants.

The FCA regulates SIPP providers' handling of death benefits and complaints. Beneficiaries unhappy with how a SIPP provider has handled an inheritance claim may be able to take the matter to the Financial Ombudsman Service in some circumstances.

Pension Tax and Compliance Considerations

Scheme administrators must report death benefit payments to HMRC and apply the LSDBA correctly. Excess death lump sums are taxed at the beneficiary's marginal rate through PAYE.

Beneficiaries should keep records of inherited pension payments and consider the interaction with their own tax position. HMRC's personal tax account can help track income for the tax year.

Practical Example

A UK SIPP holder dies at age 72 with a £400,000 SIPP, having nominated their spouse as the beneficiary. The scheme administrator pays the remaining funds into beneficiary's drawdown for the spouse. The spouse draws £20,000 a year from the drawdown pension, tax-free under the LSDBA. Future investment growth continues inside the wrapper and the unused fund can pass to successors on the spouse's death. This is illustrative only.

Risks, Costs and Limitations

Tax rules on pension inheritance can change. The Autumn Statement 2024 outlined policy intent to include unused pension funds within IHT from a future date; UK readers should check the latest position before relying on existing rules.

An out-of-date expression of wish can result in death benefits going to unintended beneficiaries. Family disputes can arise where the administrator's discretion is exercised in ways some family members disagree with.

What UK Readers Should Consider Before Acting

UK readers should review SIPP nominations regularly and consider how the SIPP fits with the wider estate plan, including wills, trusts and other pensions.

Specialist regulated advice and, where the estate is complex, legal advice from a solicitor with experience in pensions and estate planning, can help align decisions with the saver's wishes.