Most people don’t like thinking about death, much less talking about it! Doing so forces us to imagine leaving our loved ones behind – a thought that makes us deeply uncomfortable, but recent world events have many people asking the question – “What happens to my pension when I die?”.
Death is inevitable, no matter how much we might try to avoid it, and the best thing you can do for your family is to ask the uncomfortable questions while you can in the interest of getting financially prepared.
Putting plans in place now means that they will have one less thing to worry about while they are grieving. This is particularly relevant in the context of pension planning.
Differences between pre-retirement and post retirement pensions
What happens to your pension when you die depends on several factors, primarily the type of pension plan in place at the time. The tax implications vary greatly between the different types, so it is well worth speaking to a qualified pension expert to make sure you choose the right one for you.
Here is a general overview of the rules surrounding the various pension types:
If you have a PRSA (Personal Retirement Savings Account), a PRB/BOB (Personal Retirement Bond/Buy Out Bond), or a personal pension, and die before benefits are taken, the full gross value of the plan is paid to your estate.
There are no inheritance tax implications if the beneficiary is your spouse, but your cohabiting partner or child may be liable for tax, depending on the amount.
Alternatively, the fund could be used to provide a pension for your spouse, which will be subject to income tax and USC.
In the case of a Vested PRSA, it is treated the same as an ARF (Annual Retirement Fund) upon your death.
Personal Retirement Bond / Buy Out Bond (PRB / BOB)
A PRB/BOB is usually taken out by someone who is leaving their current employer and is thus leaving the company pension. In the event of your death, your PRB/BOB will be treated the same as a personal pension or PRSA.
If you die while part of your employer’s Defined Contribution (DC) scheme, then the value of your pension pot may be payable to your estate.
Death in Service:
If you die before retirement, a lump sum of up to four times your final salary may be provided to your dependents.
In addition to this, an approved scheme may also provide your spouse or dependent with a pension. Beneficiaries other than spouses or civil partners will be liable to inheritance tax.
If you have left service and have a preserved benefit, then the full gross value of your pension plan will be paid to your estate. As usual, your spouse or civil partner will be exempt from paying inheritance tax. However, other beneficiaries may be liable.
The rules affecting your pension are different if you pass away after retirement, and taxation differs dramatically. In this case, your pension benefits may be in the form of an annuity (a series of regular pension payments for the rest of your retirement) or an Annual Retirement Fund (ARF).
An annuity gives the policy owner the guarantee of a specific income for life. You may have one of three types of annuity, namely ‘Single Life’, ‘Joint Life’ or ‘Enhanced’.
The differences are as follows:
Single Life – this provides you with a guaranteed income for the rest of your life.
Joint Life – this provides a guaranteed income for you and someone else for the rest of your life (useful if you have someone who is financially dependent on you).
Enhanced – in this case, the life insurance company will assess your health and give you a quote based on the results. The annuity contract usually ends in the event of the death of the contract owner, but there are some instances in which your spouse or dependent may be entitled to continue receiving payments after you die, for example in the case of a Joint Life annuity.
You may also have the option of choosing a guaranteed period, ensuring that your pension payments continue if you die during that period.
For example, if you choose a guaranteed period of ten years and happen to die in the first year, your pension will continue to pay out for the remaining nine years.
If you die while holding an ARF pension, then the remaining funds can be inherited by your spouse, civil partner or other beneficiaries. The rules surrounding liability for income tax and CAT (Capital Acquisitions Tax) will depend on your relationship with the beneficiary.
What happens to my pension when I die?
Navigating the complex rules and regulations of pensions can be challenging, and there is much more to it than we can cover in a single article alone. It’s worth taking the time to sit down with a qualified professional who will be able to walk you through all your options and help you choose the right pension for you, and our team would be happy to help.
Schedule an appointment with Symmetry Financial today and give yourself the peace of mind that your loved ones will be taken care of when you’re gone.