What happens to your pension when you die?
Have you ever wondered “What happens to my pension if I die?” There is no common set of rules governing how death and pensions relate.
In this video, Financial Advisor Donal Milmo-Penny gives a brief explanation. For more technical information read on below.
What will happen to your pension when you die will depend on your structure or structures, whether you are retired, still at work or if your pension relates to past employment.
If you're unsure of your pension benefits from a previous employment, or would like to track down a lost pension, visit PensionFinder.ie
Let’s look at the varying structures and what happens when you die:
Pre-Retirement
Occupational Schemes
Death in Service - Lump sum of maximum 4 times salary will be paid with the balance used to buy a survivors pension which cannot exceed the maximum pension the member would have received if they had stayed in service.
Death before payment of preserved benefits- Where benefits are preserved within in a scheme, held in a Buy-out-bond or a PRSA then they can be paid to in full to the deceased’s estate. A preserved benefit will occur from pension benefits accrued in a previous employment. Should benefits from an old scheme be transferred to a scheme in a new employment the rules of that scheme will apply and hence the 4 times salary plus survivors pension rules.
Personal Pensions
Technically the value of contributions to your scheme plus interest will be paid to the deceased’s estate. In practice the value in the scheme will be paid to the deceased’s estate.
Post-Retirement
Death in retirement:
Approved Retirement Funds - ARFS are unusual as when passed on they are not treated in the same way as other inheritances. This is because any payment from an ARF is treated as a distribution. Such payments will be subject to income tax payable by the ARF owner in the year that they died.
There are two exemptions to this rule:
Should the value of the ARF be passed to the spouse or civil partner of the deceased, it will not be treated as a distribution.
Should the value of the ARF pass to a child of the deceased who is under 21 then it shall not be treated as a distribution but will instead be subjected to inheritance tax.
Where a distribution is made to a child over 21, this distribution will be exempted from inheritance tax but will be subjected to income tax as Case IV Schedule D income. This is levied at a rate of 30%. This tax will be collected from the ARF at source.
Given their particular treatment, ARF’s are ring-fenced in their treatment and are not looked at as part of the broader estate.
Vested PRSA’s - Section 90 of the Finance Act 2013 allows for vested (post retirement) PRSA’s to be treated in a similar manner to ARF’s.
Annuity
Annuity – ends on death
Guaranteed Annuity – continues in payment but if less than 5 years a lump sum may be paid in lieu
Annuity with dependant’s pension - Dependants pension will be paid as per the annuity purchased. Spouse or Civil partner are automatically deemed dependants. Children can be as dependants up to age 18 or 21 (if in full time education). Benefit cannot exceed the member’s entitlement at retirement.
In certain instances these rules may be unfavourable or create excessive risk to your estate.
Take for example an individual who has built up considerable benefits in one employment but is now moving jobs. Should they move their benefits to their new employment then their estate will be eligible to receive 4 times their salary if they died whilst in the new job.
Through simple restructuring, the estate would receive the full value in the same circumstances. This highlights the need to seek advice before retirement.
To discuss further you can contact us here, or learn more about pension planning.