As with all things to do with pensions there is nothing simple when it comes to what is paid out and also depends on if you die before or after your pension kicks in
You spend your entire working life accumulating what you hope will be a sufficient Pension Fund for your retirement, for many people it may 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.
For this reason, it’s perfectly natural that you might ask yourself the question “What happens to my pension when I die?”
Unfortunately, like most things to do with pensions, there is no simple, straightforward answer, its complicated and the answer depends on a number of factors, such as, did you die before retirement? After retirement? Does the pension relate to your current employment 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 touch on what might happen to your pension benefits when you die in a number of different circumstances.
Firstly, let’s look at what happens if you die before retirement, before you’ve had a chance to access your Pension benefits. 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”, in this case 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 you and also your employer.
There are rules, however, as to how this would be paid out. Your estate can receive a Tax-free lump sum of up to 4 times your salary + the value of any contributions you have made. If the total value of the pension exceeds this figure, then the remainder would then be invested in an Approved Retirement Fund ARF), this is a welcome change which was introduced in the Finance Bill 2021, before that you would have had to buy an Annuity with the balance of the fund. You also need to 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 the treatment on death is very different to that of Occupational Pensions, for these types of policies the entire value of the Pension pot would be paid as a Tax-free Lump Sum into your estate.
Up to now we have looked at what happens if you die pre-retirement but in reality, it’s much more likely that people will die 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 Tax purposes.
On your death, if you are married your ARF will pass to your spouse, it will then become an ARF in his/her name and the same ARF drawdown rules and taxes will apply.
However, if you’re Single or if your spouse has pre-deceased, you then your ARF may be passed on to your children. The age of your children will determine how the ARF is treated for Tax, if the children are Under 21 then the ARF will be liable for Inheritance Tax at 33% and normal rules apply, however, if the children are over the age of 21, they will pay income tax at a rate of 30% instead of Inheritance Tax at a rate of 33%. Also, receiving the ARF from a parent won’t impact their Group A Lifetime inheritance tax threshold (currently €335,000).
A much small number of people may have chosen to purchase an Annuity at Retirement rather than an ARF. 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 or you die within the “Guaranteed” Period which is usually up to 5 years.
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. Wealthwise Financial Ltd T/A Wealthwise Financial Planning is Regulated by the central Bank of Ireland #CI6614
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