The top 10 questions you ask us about pension death benefits (and all the answers you need)
As we are sure all financial planners have discovered, talking to clients about how to deal with their assets in the event of their death is not always the easiest conversation.
For many, this may seem something that is too far in the future for them to worry about. Others may just not want to talk about it at all.
While this can be understandable, considering how a client’s assets will be left after their death is an area that financial planners have to consider.
This is particularly true for pensions. As pensions fall outside a client’s estate for IHT purposes and can be hugely tax-efficient, they can form a significant part of a client’s long-term plan.
In the past this has been an area of some complexity. However, in recent years, the rules surrounding death benefit from pension schemes (such as SIPPs) have been simplified.
- Where a client dies before the age of 75, the benefits can be paid to a beneficiary free from tax
- Where a client dies over the age of 75, any distributions are paid to beneficiaries at the recipient’s marginal tax rate (except where this is paid to a charity).
Note that, when an individual dies under the age of 75, the payment of death benefits is a “benefit crystallisation event” (BCE). Therefore, a SIPP is subject to a Lifetime Allowance test before benefits are paid.
Despite this apparent simplicity, we believe there is still ample opportunity for financial planners to aid both clients and their nominated beneficiaries in how to deal with any death benefit payments from a SIPP.
For example, withdrawing benefits from a SIPP just because it is possible to do so may not necessarily be the right thing for those who are nominated as beneficiaries.
This is an area where many advisers and clients have questions – not only concerning how death benefits can be paid, but also the processes involved in ensuring that all the paperwork is in order.
To help you, here are the top 10 questions that we’re asked in relation to the payment of death benefits from an IPM SIPP – and the answers you and your clients need.
1. Who decides where death benefits are paid to?
IPM are the sole trustees of the IPM SIPP. Consequently, IPM has sole discretion as to where benefits are ultimately paid.
However, the reality is that we will always look for direction as to who should receive benefits.
When setting up a SIPP, we ask all clients to complete a “nomination of beneficiaries” form. It is important that clients complete this form and review it regularly, particularly if there has been a change in their circumstances.
If preferable, an individual can write to IPM giving us clear instructions as to how we should treat their SIPP in the event of their death.
Where possible, we always prefer that amounts left to nominated beneficiaries are done so on a percentage basis. By nominating more than one beneficiary, this gives us more flexibility as to who we can consider when it comes to paying death benefits. This is because we know that it was an individual’s intention for us to consider all the beneficiaries.
2. How are death benefits taxed, and who pays this?
As mentioned above, where an individual dies before the age of 75 there is generally no tax to pay (subject to a Lifetime Allowance test – more on this below).
This even applies should the nominated beneficiary elect not to take benefits they are entitled to immediately after these have been designated for their benefit.
Where an individual dies after the age of 75, any distributions from the SIPP are taxed at the recipient’s marginal rate. The tax is payable by the recipient.
3. How can someone amend their death benefit nomination?
An individual can make an amendment to their death benefit nomination at any time by completing a new death benefit nomination form, available on our website.
4. Can a client check who is nominated as a beneficiary on an IPM SIPP?
Yes. Either the client or the appointed financial adviser can contact IPM in the usual way and we will provide a copy of the latest nomination.
5. Are benefits held in a SIPP treated as part of my estate for Inheritance Tax purposes?
IPM are trustee of an individual’s pension benefits on their behalf. So, it falls outside of their estate for Inheritance Tax purposes.
It is for this reason that an individual cannot tell IPM where they would like death benefits to be paid. Instead, this is a decision made by IPM in our role as trustee while taking individuals’ nominations into consideration.
6. What options does a nominated beneficiary have in respect of benefits they receive?
In general, the options available to nominated beneficiaries are:
- Retain benefits within a SIPP where they are the designated beneficiary
- Take the benefits as a death benefit lump sum and pay any associated tax due, if any
- A combination of the above two options.
Everyone’s circumstances are unique. So, no two scenarios are the same when it comes to paying death benefits.
Factors that can impact the decision as to how benefits are paid can include:
- The age of the nominated beneficiaries
- The assets held within a SIPP (for example if a commercial property is the main asset, it is not going to be as simple to sell part of this)
- The financial circumstances of the nominated beneficiary.
There have been scenarios where we have paid significant, six-figure value SIPPs to a nominated beneficiary as a tax-free lump sum death benefit, where an individual has passed away before the age of 75.
We have also seen scenarios where individuals have nominated their children who are under the age of 18. These benefits have been placed into IPM SIPPs on the child’s behalf.
Other beneficiaries have elected to take smaller lump sums for things such as weddings, while most of the benefits are retained in the SIPP which we continue to manage.
Beneficiaries can also transfer any benefits held by IPM on their behalf to alternative pension arrangements which they may have elsewhere, where this is possible.
Read some useful case studies for more guidance concerning how death benefits are paid.
7. Can a nominated beneficiary forego their entitlement to death benefits?
This is a question advisers, planners, and clients often ask us. It is usually in the context of where an individual has died and left benefits to their grown-up son or daughter.
Clients ask us whether the child must be the beneficiary, or whether the benefits can be passed on to their children (that is, the deceased’s grandchildren).
Returning to the first question: IPM as trustee has ultimate discretion as to where benefits are paid. However, we do look to an individual’s nomination as to who benefits should be paid to in the event of death.
This is why it is important for an individual to nominate everyone they would like IPM to consider.
Considering the above scenario – if the individual who had died had included his grandchildren on his nomination form (even if this was 1% each) IPM can consider the son or daughter’s request. We can pay the benefits that the deceased had indicated to them, to the grandchildren.
8. When valued upon their death, an individual’s SIPP is subject to a Lifetime Allowance charge. Who pays this?
The responsibility to pay any Lifetime Allowance charge resulting from BCE 5C or BCE 5D is the personal representative.
As with other Lifetime Allowance charges, the level of tax charge that applies depends how the benefits are paid. There is a 55% charge where benefits are paid as a lump sum or 25% where benefits are taken as dependent’s drawdown.
9. A nominated beneficiary wants to retain their benefits within an IPM SIPP. What do they need to do?
We have specific paperwork that can establish an arrangement where these benefits can be held and where the nominated beneficiary has these benefits designated on their behalf.
The client will also need to complete a survivor’s death benefit nomination form which details where the benefits should be paid to in the event of their death.
10. Can a client nominate a charity to receive death benefits from a SIPP?
Yes. A charity lump sum death benefit can be paid provided that:
- The individual must have nominated the charity and
- No dependents of the individual are alive.
The charity must be registered with the relevant authority which, for England and Wales, is the Charity Commission for England and Wales.
Providing these conditions are met, a charity lump sum death benefit payment can usually be made free of tax.
Get in touch
If you want to have a chat about pension death benefits, or any other aspects of pension planning, please contact us. Email info@ipm-pensions.co.uk or call 01438 747 151.