MONEY MATTERS: This week, DD’s Finance columnist Shona Chambers from John McColgan Financial Services looks at what happens to your pension contributions after you pass away.
This is a frequent question with new clients who often wonder what will happen to their pension if they die before retiring or soon after they retire. Will all those years of faithfully making pension contributions be for nothing?
It is a topic I have covered in the past but it is worth revisiting as I have a number of queries relating to this topic recently.
The rules which Revenue have set out are different depending on when you die and the type of pension you have.
If you are a member of an occupational pension scheme and die while in service, a lump sum of up to four times your salary, plus the return of your pension contributions and AVCs may be paid to your estate. Your scheme may also provide a pension for your spouse or civil partner, or for a dependant depending on scheme rules.
If you have left service and die before retirement age and have transferred your pension benefit to a Buy Out Bond or PRSA, the remaining value of pension contributions will be paid to your estate on death. Inheritance tax may be payable depending on the beneficiary.
If you die before retirement and have a personal pension, the full amount of your personal pension is usually paid as a lump sum to your beneficiaries.
However, if you die after retirement, how your pension will paid out will depend how you have chosen to take your benefits.
With proper planning, pensions can be used as vehicles to distribute assets on death in a tax efficient manner.
For example, if you have chosen to reinvest your pension fund in an ARF rather than an annuity (not everyone has this option), it can pass after your death to your spouse or civil partner and become an ARF in their name. He or she will pay income tax on any money they withdraw from the fund. Your ARF may also be passed on to your children. Children over the age of 21 will pay income tax but not Capital Acquisitions Tax (CAT). The inheritance of the ARF will not affect their inheritance tax threshold. With proper planning, the income tax on a ARF which has been inherited can be paid to revenue using a special kind of insurance policy. An independent financial advisor like me can advise you how to best plan for this.
If you have purchased an annuity, the annuity will generally die with you, unless you have a joint-life annuity or dependents pension built it. In a single life annuity, the insurance company sometimes guarantees that an annuity will be paid for at least five years, in which case your dependents may see some benefit. A joint life annuity or dependants pension can have varying rules depending on what is or was on offer at the time of purchase and it is best to seek advice regarding your specific circumstances.
As I mentioned above, pensions are not straightforward and it is impossible to apply a one size fits all approach. If you are approaching retirement or need more advice about your options contact an Independent Financial advisor like me who can give you a clearer picture of your options.