Jessica List, pension technical manager, Curtis Banks, presents a case study where an individual is inheriting the funds from her mother’s SIPP and how death benefits and the different chargeable rates may apply.
Alison’s mother, Tina, recently passed away at age 73. Alison is acting as her mother’s personal representative and has been liaising with Tina’s SIPP provider to get them everything they need in order to pay out the death benefits. Alison was also the only beneficiary listed on her mother’s expression of wishes, and she has no reason to think there will be any problem with her inheriting the funds.
Among the paperwork Alison has received from the pension provider so far, she noticed a reference to her mother’s funds needing to be tested against the lifetime allowance. Alison hadn’t heard of the lifetime allowance before, but after some research feels like she has a basic understanding of how it works. She also looks back through her mother’s paperwork and discovers that Tina had already used up 90% of her lifetime allowance taking benefits from another pension several years ago. The SIPP is her mother’s only other pension, and the last valuation Alison can see put the value at around £150,000. Tina hadn’t taken any benefits from the SIPP.
From what she’s read, Alison believes this means her mother’s SIPP will face a lifetime allowance charge. Alison decides to call the provider to see how much she might receive after the charge, as she had read about two different charges and isn’t too clear on how it works.
Alison speaks to Fraser, who firstly explains how lifetime allowance charges are calculated. He confirms that there are two different rates, as Alison had read about: 25% and 55%. The higher rate applies where the benefits are being withdrawn as a lump sum, and the 25% charge applies if the benefits are being paid as a pension. This also applies to lifetime allowance charges that arise in relation to death benefits. Alison was intending to put the funds into beneficiaries’ drawdown if she was chosen as the beneficiary, so she understands that the 25% charge would apply. Alison asks if there’s anything else that would reduce the amount that went into her drawdown account.
Fraser then explains that the lifetime allowance charge won’t be deducted from the death benefits, and the full value of her mother’s SIPP would be put into beneficiaries’ drawdown. Alison is confused – she read the paperwork from the other pension her mother accessed, and remembered it talking about lifetime allowance charges being deducted from the pension funds. She asks Fraser if the rules have changed, or if it’s something that varies depending on the provider.
Fraser explains that there are different processes for lifetime allowance charges depending on whether the tests are taking place during a person’s lifetime or in relation to death benefits. During a person’s lifetime, providers are jointly and severally liable for any charges that arise, and they are responsible for paying and reporting the charges to HMRC. However, in relation to death benefits, the deceased’s personal representatives are responsible for calculating and reporting charges to HMRC, and the beneficiaries are responsible for paying the charges.
Fraser goes on to explain that once the death benefits have been paid, Alison will receive confirmation of how much lifetime allowance was used up, and she will then need to work out if her mother exceeded the lifetime allowance. If this is the case, as it sounds as though it will be, Alison will need to report this to HMRC. Once HMRC has determined how the benefits were paid and who received them, each beneficiary will receive a request for their share of the lifetime allowance charge. It’s then up to each person how they settle the charge. Some beneficiaries use the death benefits to pay the charge – either using some of their lump sum or by withdrawing an income payment – but it’s not required.
Alison is chosen as the only beneficiary for her mother’s pension, and opts to keep the benefits in beneficiaries’ drawdown. She receives a letter from the provider confirming the exact amount that was designated to drawdown and how much of the lifetime allowance this used. Alison calculates that the benefits exceeded her mother’s lifetime allowance by £40,000. After checking the exact requirements online, Alison writes to HMRC with details of her mother’s lifetime allowance situation and the calculations she’s completed. A few weeks later, she receives a letter from HMRC asking her to settle the £10,000 charge.
Looking at her other savings and investments, Alison decides not to withdraw any funds from her beneficiaries’ drawdown account to pay the charge, in order to make the most of the pension wrapper tax advantages. She pays the charge from other funds and keeps the drawdown account intact.