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Self-invested personal pensions and estate planning to reduce inheritance tax liability

View profile for Jill Rushton
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What happens when a business partner dies?

Self-employed business owners often have a person pension or self invested personal pension (SIPP) and it is important to consider these when estate planning.

A significant chunk of your wealth could be tied up in the SIPP.As much, or more, than your business or house. So it is worth knowing how these work and their implications for inheritance tax planning.

SIPPs are defined contribution schemes where you build up a pot, which is usually invested. How much you get when you retire depends on how much of a pot you have built up. The pension is administered by trustees who decide where your pension pot should go if you die before it is used up. However they take into account any expression of wishes or nomination that you have made. Therefore it is important to check that you have made a nomination and that you keep them up to date. Unlike with final salary pension schemes you can usually leave your pot to a wider group of people, not just your spouse, but your children or even charities, for example.

A key feature of pensions is that they pass outside your estate. So you cannot leave them in your Will but they do not attract inheritance tax. The way you decide who they go to is in the nomination to your pension trustees and as they do not attract inheritance tax they can be a way of inheritance tax planning.

If your estate is of a size where inheritance tax may need to be considered, then it is very worthwhile to know your pension scheme rules and factor your pension scheme into how you want to structure your estate. For example some of the pension pot could be left to children which would give them an inheritance while some of the other assets, which would normally attract inheritance tax, could be left to a spouse which would take those out of inheritance tax liability too.

It is also worth finding out if you have any final salary schemes from previous employment and what will happen with those in the event of you dying. The rules are different but they could provide some income, for your spouse for example, to take into account when allocating the rest of your assets. For the same reason it is worth checking the position on state pensions. The state pension is a personal entitlement and cannot be left in an estate, but in some circumstances a spouse could get an uplift on their own state pension which needs to be considered when looking at their total income in the event that you pass away.

There are some complicated rules on what income tax beneficiaries may have to pay on a pension, depending on when you die, and we would recommend that you take advice from a solicitor when estate planning as there are lots of other issues to consider. Our Wills and Probate team have expertise in this area and can talk you through it in a friendly and understandable way.

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