Your pension is likely to be your biggest financial asset
Have you ever wondered “What happens to my pension if I die?”
Maybe this is a question we need to give more attention to, after all, your pension is likely to be your biggest financial asset, possibly worth more than your house or any other savings you may have, and it may be crucial in helping to provide for your family, and perhaps your spouse’s own retirement.
There is no common set of rules governing how death and pensions relate. like everything else to do with pensions, it’s complicated, opaque, and full of jargon
What happens to your pension when you die will depend on a number of factors, such as, did you die before retirement? After retirement? Does the pension relate to current or previous employment? Pensions can also be unusual in how they are treated for the purpose of Inheritance. Particular attention should also be given to the treatment of post- retirement assets in this regard.
In this article I will examine what might happen to your pension benefits when you die.
Firstly, lets look at what happens if you die before retirement. There are many different types of Pension contracts in Ireland, Occupational Pensions, PRSA’s, Personal Pensions, Buy-out Bonds etc, each of these pension types have different rules as to how the benefits are paid in the event of the death of the member.
If you are a member of a Pension scheme through your employer (an occupational Pension), and you die while you are still working, this is called “Death in Service”, then your estate will be entitled to a “surrender value” of your pension, which means the value of all contributions made into the policy by both the employer and employee.
There are rules, however, as to how this can be paid out. A lump-sum of up to 4 times your salary + the value of any contributions you have made can be paid out in cash to the estate. If the value of the pension exceeds this, then you would have to purchase a spouse’s pension with the remainder using what’s called an Annuity.
Watch out for the small print, some pension schemes for example, won’t give your estate back employer contributions if you die within 2 years of joining the scheme.
If you have a private pension on the other hand, such as PRSA or Personal pension then the entire value of the Pension pot would be paid as a Lump Sum to your estate.
We’ve looked at what happens if you die pre-retirement but its much more likely that people will dies post-retirement, after they have taken a Tax-free Lump sum and invested the balance of their Pension in an Approved Retirement Fund (ARF). An ARF is quite unusual in that it is not treated the same as other assets for inheritance purposes. On your death your ARF will pass to your spouse, it will then become an ARF in his/her name and the same ARF drawdown rules apply. If your spouse has pre-deceased then your ARF may be passed on to your children. Children over the age of 21 will pay income tax at a rate of 30% but not Inheritance Tax at a rate of 33%. Also, receiving the ARF won’t affect their Lifetime inheritance tax threshold (currently €335,000).
A small number of people may have chosen an Annuity rather than an ARF when they retired. Unfortunately, on death, an annuity will die with you and the payments will stop unless you have added extra features such as a spouse’s pension.
In summary, your Pension is most likely one of your most valuable assets and will form a substantial part of your estate when you die. You should always seek independent professional advice in this area.
Barry Kerr CFP® is Founder & Managing Director of Wealthwise Financial Planning who are based in Carrick on Shannon and Galway. All details and views contained within this article are for informational purposes only and does not constitute advice. Wealthwise Financial Planning makes no representations as to the accuracy, completeness or suitability of any information and will not be liable for any errors, omissions or any losses arising from its use.
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