I am 72 years old and have a final salary pension that is perfectly adequate for all my needs. I also have a Sipp, which is now dormant as I no longer make any payments into it, and I also don’t make any withdrawals from it.
I understand that when I die my Sipp can be passed on to my beneficiaries free of inheritance tax (IHT). Can I pass this fund on to my beneficiaries now, before I die, without them incurring any tax liabilities, even if they take out lump sums or an income from the fund?
There are three beneficiaries with equal shares in the fund.
The actual treatment of an inherited pension pot depends on whether you die before reaching age 75 or not.
If you die before age 75, your beneficiaries can choose to take their share of the money in one lump sum, or keep it invested in the pension and draw it out as required. In this situation, there would be no IHT and no liability for income tax on the beneficiaries.
However, if you were to die after age 75, your beneficiaries would have to pay income tax at their marginal rate on any withdrawals they take from the pension. There would still be no IHT to pay.
Unfortunately, it is not possible to transfer pension funds to someone else while you are alive.
If you were particularly keen to pass on some money to your beneficiaries now, you could consider withdrawing some money from your pension immediately and then gifting it to them. You can take 25% of the fund tax free (unless you have already taken it) and the rest would be taxed as income at your marginal rate.
The advantage of this is that you can pass on some of the money to your beneficiaries now. However, you could end up paying income tax on the withdrawal and the gifts would potentially be included as being part of your estate for IHT calculation purposes if you were to die within seven years of making them.
Please also bear in mind that a will does not normally control who inherits your pension. Your pension company usually makes the final decision by referring to your original nomination of beneficiary instructions. If you want to ensure your pension assets are distributed in line with your wishes, it is really important to make sure that your pension provider has an up-to-date record of your chosen beneficiaries.