A pre-elected beneficiary is the person who recieves money or another form of assets in the event of another persons death, this person is known as the benefactor. For example in the event of a sipp holders death the clients beneficiary would normally receive a tax free lump sum of whatever was being held in the pension fund.
In the UK the pre-elected beneficiary of a sipp, which could include; your wife, civil partner, dependants or another named individual, will receive a 65% inheritance tax free lump sum if the benefactor dies before the age of 75. A 35% tax charge will first be applied to the pension fund.
If the holder of the sipp dies after the age of 75 and has already been drawing an income for the sipp then a 70% tax charge will be removed from the fund and the beneficiaries will receive the remaining 30%; this however will be subject to UK inheritance tax.
However, if no retirement benefits have been drawn from the pension plan, the whole fund will consist of uncrystallised benefits. In this event the whole fund can be paid as a lump sum to the nominated beneficiaries, inheritance tax free. It should be noted that the fund will be tested against the Lifetime Allowance which currently stands at £1.7million for the 2009/10 tax year, if this is surpassed a lifetime allowance charge may be applied.
As an alternative to this the fund can also be used as a dependants pension either by purchasing an annuity or by income draw down, in either case the fund will be subject to income tax.
For further help on sitting up elected beneficiaries for your sipp contact us and request a free review from one of our partnered advisors to help get the best deal for you.