Can You Split a SIPP Between Spouse and Children to Reduce Inheritance Tax?

I currently have a SIPP for which I need to nominate beneficiaries. I am retired with sufficient income and assets, and hence kept this pot as a means of passing it on to my children and grandchildren.

Given the Inheritance Tax changes coming in 2027, and that the value is over 500k, I want to make a tax-efficient decision on naming beneficiaries.

My question is: can I nominate multiple beneficiaries so that I use the IHT allowance for the money to be passed to the children, and the remainder over the IHT allowance to be passed on to my spouse, since he will not be liable for IHT?

This is quite a complicated issue. For maximum tax efficiency, you should ensure that you have taken tax-free cash from your pension. Whoever you leave your estate to, this tax-free component disappears when you pass.

Beyond that, all transfers to a spouse on death are exempt from Inheritance Tax. It is therefore potentially wise to leave everything to your spouse in a reciprocal arrangement and then write further provisions in the event that either of you lasts longest. Both your own nil-rate band

A caveat here is that if the first to die has an estate over £2m, you may lose some of your residence nil-rate band to the tapering rules

A further caveat is your age. If you pass away under age 75, your pension beneficiaries will pay no income tax on drawing a beneficiary pension. If you passed aged 75 or over, then they will pay their marginal rate of income tax. If the pension is reserved for your children, then you could decide to take the pension and gift it during your lifetime. In some circumstances, you would be able to take advantage of the gifting out of excess income rules, which would make these gifts ‘exempt transfers’. This will save you IHT, but will mean paying your marginal rate of tax on the drawings. There are also rules to abide by to qualify for this.

In short, the calculation of IHT and income tax in this scenario depends on your circumstances.

There is a complicated balance of inputs required to make a decision here. But the simplest answer I can give is that you probably don’t need to worry about making use of your own exemptions on first death, as the most significant ones will pass to your spouse.