SIPPs and IHT before age 75

[Rajput1962]

I have some questions around what happens at age 75. I understand that if I die before age 75, then the SIPP can be passed on tax free. However, it is unlikely that I will ever need to draw on it as I will have sufficient income from my DB/State pensions to fund my modest lifestyle as well as from money invested in ISAs if needed. My total assets ignoring the SIPP currently give rise to an IHT on the excess. I intend to contribute the annual £2880 into the SIPP until I reach age 75 (currently 58 and taken early retirement this year).

I understand that if I die after 75 then the beneficiaries will pay tax at their marginal rate, most likely 20% on the SIPP. This suggests to me that for them to avoid this 20% tax, it would be 'better' for me to withdraw the tax free amount (well) before age 75, perhaps even in my 60s, and to give it away to them with enough time to minimise the 7 year gift rule, and thereby save them the 20% tax.

Q: Would withdrawing the allowed 25% tax free from the SIPP before age 75 have any impact on the tax paid by any beneficiaries if I were to die before age 75? Does the balance still pass over tax free? Is there is situation where I shouldn't withdraw 25% tax free from the SIPP before age 75?! Does the SIPP 'status' change in any way if only the 25% tax free is withdrawn before age 75 and the remainder left invested? Is there any impact on my intention to contribute £2880 annually?

I think I understand that even if I withdraw 25% tax free before age 75, and die after 75, that the beneficiaries will pay tax at their marginal rate on the inherited amount balance. I am making an assumption that the 25% tax free withdrawn before age 75 is spent or given away so that it won't form apart of my estate. Surely they stand to gain more overall by being given the 25% tax free before age 75 and then paying 20% tax on the inherited amount?

I am ignoring any thoughts about crystallisation because simplistically I would still keep any crystallised amount invested so that growth would still be similar to any uncrystallised invested amount. Or is there some tax efficient benefit from crystallising that I haven't figured out?

[Adamski]

Yes I believe you are right and this would save your beneficiaries tax under current rules. But my view is decision depends on what it is used for. If the gift is for something like a house deposit, help them on the housing ladder, then would be a good idea. But may want to keep it invested, make them nominated beneficiaries and they could have as a pension in future on their retirement, if they don't need it now.