What happens to my pension when I die?
No one likes to think about death but unfortunately it is a reality – it happens, young and old.
As a financial planner I have to think about it and a common question I receive is:
‘Where does my pension go when I die?’
A common myth is that it disappears – it doesn’t!
You pension is an asset and it’s important to understand exactly what happens to your pension when you pass away.
It varies per arrangement and in this blog I will cover the different scenarios.
Furthermore, to keep it simple, I will break it down into Pre-Retirement arrangements and Post-Retirement arrangements.
Pre-Retirement
Personal Pension
Should you die before retirement the full value of your personal pension is paid as a lump sum to your estate.
Personal Retirement Savings Account (PRSA)
Similar to a personal pension, if you die before retirement, the full value of your PRSA is paid as a lump sum to your estate.
Nice and simple!
Personal Retirement Bond (PRB)
Keeping with simplicity, if you have a PRB which relates to a previous employment, the full value of your PRB is paid to your estate.
If the PRB relates to an employment you are currently active in, the value of the PRB and your main scheme benefits are subject to the 4 x salary rule (see occupational pension scheme below).
Defined Contribution Occupational Pension Scheme – still in employment (Death in Service)
The maximum allowable lump sum by Revenue to be paid for Death in Service is 4 times your annual gross salary.
If the value of your pension is less than 4 times your annual gross salary, the full value of the pension is paid to your estate as cash.
Once the value of your pension is more than 4 times your annual gross salary, then 4 times your gross salary plus the value of your own contributions will be paid as a lump sum.
Any surplus amount is then used to purchase an annuity for your surviving spouse or dependents.
Point to note, any separate Death in Service life cover benefit provided by your employer (typically a multiple of salary) contributes to the 4 times salary limit.
Defined Contribution Occupational Pension Scheme – left employment (Deferred Member)
If you have left service and your benefits remain in the scheme, the Trustees are not bound by the 4 times salary rule.
Therefore, the full value of your pot is paid to your estate as a lump sum.
Post-Retirement
Once you access your benefits, after taking your tax efficient lump sum, the surplus of your benefits will either purchase an annuity or invest in an Approved (Minimum) Retirement Fund (AMRF or ARF).
AMRF or ARF
Spouse/civil partner – the value can transfer to an ARF in their own name tax free.
Should you leave the value of your AMRF or ARF to your children, it’s taxed differently dependent on their age.
If they are under age 21, usual inheritance tax rules apply.
If they are over age 21 they pay income tax at a fixed rate of 30%.
However the value is then not assessable for inheritance tax.
Should you leave it to anyone else it is assessable for both income tax and inheritance tax.
Annuity
An annuity on death varies as it is depends on how the annuity is set up from outset.
If you set up a single life annuity – the annuity dies with you.
You may have set up a joint life annuity.
If so the spouse’s annuity then becomes payable to your spouse/civil partner from the date of your death till the date of their death.
The level of income your spouse/civil partner receives then depends on the % of annuity you set them up with at outset.
A spouse/civil partner annuity is typically set up with a 50% or 100% reversion.
On the death of your spouse/civil partner the annuity will then cease.
Inheritance Tax
Any lump sum payable to your estate on death from a pre-retirement pension is assessable for inheritance tax.
You can find out more about the different categories and limits of inheritance tax on the Revenue website here.
What Next
Death is such a taboo subject and it’s never easy thinking or talking about what happens on death.
Hopefully the information contained above has provided you with some clarity on the treatment of your pension on death.
Individual rules and regulation on different pension arrangement are complicated and every situation is different.
If you would like clarity on the treatment your pension on your death you can schedule a call using the button below.
Francis McTaggart CFP® SIA RPA QFA
Disclaimer: All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice.
You should always engage the services of a fully qualified financial planner before entering any financial contract.
Fortitude Financial Planning Ltd will not be held responsible for any actions taken as a result of reading these blog posts
Production