Can a SIPP be inherited?

When inheriting a private pension, the tax implications can be complex, but here’s a few key factors to consider:

In summary, the tax you pay on an inherited private pension depends on several factors but the age of the deceased is a key factor.

Lump sums are typically tax-free if the deceased was under 75 and the lump sum is within the death benefit allowance.

Otherwise, the inherited pension is usually taxed as income.

  • Who Receives the Pension? Usually, the person who died will have nominated who should receive their pension, but sometimes the provider can pay someone else. Defined benefit pensions are typically paid to a spouse, civil partner, or child under 23, though others can be paid if the scheme allows it, but may be taxed at up to 55%. If you inherit a defined contribution pot, you can nominate someone else to get the money when you die, provided it’s in a flexi-access drawdown fund.
  • Key Factors Affecting Tax: Whether you pay tax depends on the type of payment, the type of pension pot, and the age of the pension pot’s owner when they died.
  • Lump Sums:
    • If the deceased was under 75, lump sums are usually tax-free unless they exceed the deceased’s lump sum and death benefit allowance.
    • If the deceased was 75 or over, lump sums are taxed as income.
    • If the payment is made more than 2 years after the provider was notified of the death, the lump sum is subject to income tax.
    • If the lump sum exceeds the deceased’s lump sum and death benefit allowance, and they were under 75, you’ll pay income tax on the excess.
  • Other Payments:
    • Trivial commutation lump sums are always taxed as income.
    • Annuities or money from new drawdown funds (set up after 6 April 2015) are tax-free if the owner was under 75, but taxed as income if the owner was 75 or over.
    • Money from old drawdown funds (set up before 6 April 2015) is taxed as income regardless of the owner’s age.
    • Pensions provided by the scheme are always taxed as income.
  • Inheritance Tax: You usually do not pay inheritance tax on lump sums because the payment is usually at the discretion of the pension provider. If it was not, you might need to pay inheritance tax.
  • Important Time Limits:
    • The person dealing with the estate must tell the pension provider within 13 months of the death or 30 days after realizing tax is owed.
    • If lump sum death benefits go over the lump sum and death benefit allowance of the person who died, the person dealing with the estate must inform HMRC within 13 months of the death, or 30 days after they realize tax is owed. This applies only if the person who died was under 75.
  • Overpaid Tax: If you paid too much tax, you can get a refund through your Self Assessment tax return, or by filling in a specific form depending on your situation.

It’s highly advisable for anyone living overseas who inherits a UK private pension to seek professional advice from a tax advisor or financial planner who is familiar with both UK and their country of residence’s tax laws.