Beneficiary's Drawdown
amarshall
Member, Moderator
We have a client who is the sole beneficiary of her late husband's SIPP death benefits. He died before age 75 and the fund was entirely uncrystallised. He had not used any LTA anywhere else.
The plan is valued at £2.1m.
The benefits are to be paid into a new SIPP in her name.
How does this work under the new rules?
What will she actually receive into her SIPP? Is it the full £2.1m or is the excess over £1,073,100 taxed?
How will any withdrawals she takes from her SIPP be treated for tax?
Thanks!
Comments
Am assuming the benefits are being settled with 2 years.
Only lump sums get tested in the new world - that is a basic tenet of the whole change.
Death benefits in the form of drawdown are LTA tested now pre April (but the charge is 0% so meaningless).
After April designating beneficiaries drawdown does not get tested at all. They can put the full £2.1m in drawdown with no issues.
Then as she is in drawdown and it was a pre 75 <2yrs death each and every £1 she takes is tax free.
She can go into drawdown and take the full amount tax free the following day. If she took a lump sum the bit over £1,073,100 would be marginal rate tax.
Schemes and providers will always settle with the gross amounts pre 75 <2yrs - the personal reps need to sort taxation directly with HMRC.
so on the assumption the scheme can pay death benefits using beneficiary drawdown, if benefits are over £1,073,100, why would anyone ever proceed with a lump sum when you can just bypass any tax via FAD?
Gross stupidity or adviser negligence.
This was what I couldn't get my head around! Why would you even consider taking a "lump sum" (and Les's answer is pretty clear on that front!).
Thanks Les!
The only other scenario I can think of would be where the beneficiary is non UK resident as it seems most providers will only give them the option of the lump sum, unless the provider has the relevant permissions to market their products in the relevant country.
We're looking at a case just now whether the client is in this position (fortunately the client is alive and well just now so it's not currently a major issue) and two of the three potential beneficiaries live abroad (Spain).
The SSAS provider has said that they can offer Beneficiary Drawdown but I am a bit suspicious so have asked them to confirm that in writing.
It is down to the individual scheme - I don't believe there's anything fishy about allowing a non resident beneficiary. I think it's more the practicalities of being able to pay to a foreign bank account etc.
And proves the point - never assume beneficiary drawdown will be available even if you have nominations in place and the scheme allows beneficiary drawdown!
Thanks Les, much appreciated.