Inheritied Pension - LTA

[fca2019]

Looking for some advice. On pensions and the LTA for a close relative whose sadly passed away under 75.

Am I right in the following:-

The pensions should be tested against the lifetime allowance as the death being a "benefit crystalisation event".

The DB/DC pensions in drawdown are under the LTA. However I believe other DC pensions would take over the LTA.

This is because the investments have done well in the last 10 years plus the LTA coming down.

I read that the death benefits to be paid out by the pension provider as under 75 tax free. I also read that amounts over LTA lump sums should pay 55%.

Does the executor add up the LTA of the pensions and then add the cash lump sum death benefits from the remaining schemes and then inform HMRC that the LTA has been breached. Is the onus on the executor or do you wait for HMRC to tell you?

Saw an article online which said if wait two years then take the income in drawdown would instead be taxed at beneficiary's marginal rate. Is that drawdown an option usually offered by the pension providers for death benefits?

I knew it would be complicated but the rules seem in drastic need of simplication! Is the above understanding correct? Thanks

[Chrysalis]

I think it would be the pension provider’s job to inform the beneficiaries? And to gather the usual information about LTA prior to making any payment out of the pension.
Whether the provider allows beneficiary drawdown would be dependent on their rules. It’s certainly allowed, but not all providers offer it as an option.
If the beneficiary is about to inherit over £1m in pension assets tax free (I realise some of this may be in the form of a DB spouse’s pension) they may want to get expert financial advice on the best way to take the benefits, before any big decisions are taken.
I believe that the beneficiary needs to decide about how to take the pension benefits within 2 years, otherwise the pension reverts to the estate and will be distributed accordingly, without the tax benefits. If they are able to go into beneficiaries drawdown, within the 2 year time limit, then it should all be tax free. Of course it may also be able to be inherited again, once the beneficiary dies, if the money has not been used, so again, the decision about how to take the benefits needsto be thought through, possibly with expert advice. (If it’s all taken as a lump sum, paid out of the pension wrapper, this possible benefit would be lost.)

[genou]

Its up to the scheme admins to compute the effect of the BCE. In practice that may well require the executor do to some information exchanges between the various admins ( I don't know this, but I can't see how any single admin is in a position to calculate anything without knowing about the overall position ).

The 2 year limit is correct, and you really do not want to miss it in terms of decision making. As has been pointed out, any inherited DC pot is also heritable, and at least for now, is outside the scope of IHT. Some thought is needed before deciding what to do. Completely untaxed funds are a big attraction, but if it is a choice between BR Income Tax and IHT, it's not so straightforward.

[hiriskpaul]

On death, LTA tests are only carried out for uncrystallised benefits. You don't need to worry about any DC pensions already in drawdown. These are not retested for growth since crystallisation, unlike the age 75 BCE.

After testing the uncrystallised benefits, a 25% charge will be made on assets over 100% of the LTA. It is the pension providers' responsibility to do the test and pay the charge from assets. After that, as death occurred before 75, the DC pensions can be drawn free of tax by beneficiaries.

[fca2019]

Thanks I understand better now. @hiriskpaul - very helpful.

I've since learnt the pensions in total are below the LTA. I'm not expecting an LTA charge, but if one is deducted, I'll have the info to hand to go back to them.

[Bathonian]

Good morning all.

My first post, but I am a long time admirer of the board. Hope to contribute more going forwards.

If I could hijack this thread slightly, do I understand the above comments correctly, that in order to benefit from the tax free status (assuming death before 75) then:

1. One must be allocated their portion of the pension within 2 years
2. One must make a decision as to whether to receive as lump-sum, or via flexible drawdown, also within 2 years

Then i had some follow-ups in the even that flexible drawdown is selected:

3. Is it correct that if flexible drawdown is chosen within 2 years, then any payments from the pension are tax free for life, regardless of when the actual benefits are drawn?
4. In practical terms what does flexible drawdown mean, is it possible to take nothing and let the pot build and then withdraw tax free income later, say in 10 years time?
5. What are the limits of flexible drawdown, are you able to take out 20-30% in one year for example or are there limits to this of reasonable drawdown rates e.g. 3,4,5% p.a. maximum?
6. Does any special consideration need to be taken when transferring such a SIPP, in order to retain the tax benefits?
7. Lastly, with this inherited type of SIPP, will the SIPP provider normally deduct tax before payment which then needs to be claimed or would it be paid gross given the special status, like an ISA?

Thanks in advance for any help you can provide.

Bathonian

[DrBunsenHoneydew]

Good morning all.

My first post, but I am a long time admirer of the board. Hope to contribute more going forwards.

If I could hijack this thread slightly, do I understand the above comments correctly, that in order to benefit from the tax free status (assuming death before 75) then:

1. One must be allocated their portion of the pension within 2 years
2. One must make a decision as to whether to receive as lump-sum, or via flexible drawdown, also within 2 years

Then i had some follow-ups in the even that flexible drawdown is selected:

3. Is it correct that if flexible drawdown is chosen within 2 years, then any payments from the pension are tax free for life, regardless of when the actual benefits are drawn?
4. In practical terms what does flexible drawdown mean, is it possible to take nothing and let the pot build and then withdraw tax free income later, say in 10 years time?
5. What are the limits of flexible drawdown, are you able to take out 20-30% in one year for example or are there limits to this of reasonable drawdown rates e.g. 3,4,5% p.a. maximum?
6. Does any special consideration need to be taken when transferring such a SIPP, in order to retain the tax benefits?
7. Lastly, with this inherited type of SIPP, will the SIPP provider normally deduct tax before payment which then needs to be claimed or would it be paid gross given the special status, like an ISA?

Thanks in advance for any help you can provide.

Bathonian

1. Yes - After 2 years the lump sum will be subject to an HMRC tax charge of up to 45%.
2. Yes
3. Yes
4. Yes
5. No limits - zero to full fund now or at any time in the future
6. The receiving scheme will have to agree to take this sort of survivor SIPP. With time this will likely become universal.
7. They won't take tax if it's an "inheritance before age 75 survivor SIPP" - HMRC will allocate an "NT" (no tax) tax code.
If it's a 75+ inheritance SIPP it'll get its own deducting country-specific tax code, typically "BR", "CBR" or "SBR" (basic rate), "D0", "CD0" or "SD0" (flat 40/41%) or "D1", "CD1" or "SD1" (flat 45/46%).

[Bathonian]

Thank you for your reply, Dr B-H. It's much appreciated.

Couldn't be clearer.

[scrumpyjack]

I'm not sure what the legal status of the executor is in relation to the pensions as they fo not form part of the estate.
The executor should probably notify the pension trustees of the death and the trustees may ask advice from the executor if the deceased did not give specific instructions on who gets the pensions assets.

[PinkDalek]

I'm not sure what the legal status of the executor is in relation to the pensions as they fo not form part of the estate. ...

It might be clearer if your replies included a short extract of the post to which you are replying and to whom (such as I've done). I think you are replying to the OP from 6 days ago but there's been an additional question from someone since then (which has been answered).