What happens to your pension when you die?
if you die before retiring, most Irish pension arrangements pay the full fund value as a lump sum to your nominated beneficiaries or estate, generally free of income tax.
There are a myriad of questions people don’t like asking about the future. Particularly in relation to events that may occur when they die. Some may wonder whether their spouse will remarry. Others, whether they’ll miss them at all.
While ponderings of this sort may get bandied about in the minds of some, and aired from time to time, one question that’s almost never asked enough is: “What happens to my pension when I die?” There are lots of reasons why this may be so. One may be that not enough of us are sufficiently versed in pension matters to contemplate, let alone enthusiastically discuss them with confidence.
For too many, however, the question may never be asked, as they rightly presume that when they depart, so too will their entitlement to the State pension, and that will be the end of that.
CSO and CCPC figures elucidate the position. In April of this year, CSO figures showed that 17.3 per cent of all workers expect to rely solely on the State pension on retirement. In recent weeks, CCPC figures showed that between 12.8 and 15.8 per cent of all Irish adults expect to rely solely on that same source.
For those who have made additional pension arrangements, the National Pensions Helpline has guidelines on what happens to those after you die. Mention is made to dependents, and how they can expect to receive a percentage of a salary or of the pension the deceased would have received at retirement age. As for pension funds to be paid to this cohort, the importance of providing administrators of any scheme you are under, with a list of those dependents is highlighted, alongside a warning that failure to do so could negatively impact plans to leave benefits behind.
Clarity is also provided on pensions provided by place of employment in situations where an employee dies while still under contract with the company. In such cases, pensions may be paid to estates under the guidelines of a ‘surrender value.’ This means they will receive the combined value of the employer and employee policy contributions. Prudent mention is made to the conditions that accompany any such payments.
Liam O’Riordan, head of Investwise Financial Planning’s Cork office, says that one of the questions they’re most often asked by clients approaching retirement is: “What happens to my pension when I die?”
“Many assume the answer is simple; that it dies with them, as it might have decades ago under old-style Defined Benefit pensions and single-life annuities,” he says. “With modern pension structures, that's rarely the case. The real answer depends on two things: Whether you die before or after retiring, and how you structured your retirement income.”
As for what happens if you die before retiring, O’Riordan says that most Irish pension arrangements - whether private, PRSA or company scheme - pay the full fund value as a lump sum to your nominated beneficiaries or estate, generally free of income tax.
“It may still form part of your estate for Capital Acquisitions Tax,” he explains, “depending on who inherits and the thresholds involved. In occupational schemes, trustees usually have discretion, typically prioritising spouses, civil partners and dependants. This simplifies things considerably, as spouses inherit tax-free.”
Illustrating why this matters, he gives an example of a Cork-based client, a person in their late fifties who came to see him shortly after losing their spouse.
“They were worried they would have to start again from nothing,” says O’Riordan. “The spouse had been drawing down an Approved Retirement Fund (ARF) rather than an annuity. So, instead of the spouse’s pension income simply stopping, the fund itself passed straight to the client, tax-free, and they could keep drawing an income from it. This was one less thing for them to face alone at an already difficult time.” Pointing out that post-retirement, the annuity or ARF question arises, he continues: “Once you retire, this is the choice that really dictates what your family inherits.
“With a single-life annuity, income usually stops on death, unless you choose a guaranteed payment period or a spouse's pension. Otherwise, there is nothing left to pass on.
“An ARF works differently,” he explains. “It stays invested, and on death the residual fund can pass to the spouse, children or estate.”
In O’Riordan’s professional experience, ‘tax realities’ pose the most confusion for beneficiaries: “A spouse or civil partner inheriting an ARF pays no immediate income tax or CAT,” he says. “They simply take over the ARF and pay tax on withdrawals as before.”
Elaborating, he says that while children over 21 face a flat 30 per cent income tax charge on the ARF, this does not use up their €400,000 CAT threshold.
“Children under 21 are treated differently again,” he says, “with CAT rules applying instead of the 30 per cent charge.” Asked about the biggest misconception he sees, in Cork and further afield, O’Riordan replies: “It’s that people often assume their pension is sorted, simply because they nominated a beneficiary years ago. They think this, even when they haven't thought about the matter since.”
Stressing that retirement age, scheme type and drawdown choice, all shape the outcome, he wisely advises that the topic is worth revisiting with an advisor every few years. “That’s better than assuming it will take care of itself,” he says.
And yet too many of us do. It’s as though inheritability is too delicate a pension topic for us to tackle efficiently and on time. If it is, it’s no more so than the question of unlocking pensions for dying savers. The latter is something that UK government ministers are currently being asked to consider, at a time when individuals under 75 years of age, with a terminal diagnosis and a life expectancy of fewer than 12 months, can cash out their pension, and take a tax-free lump sum of up to £1.073 million.
If battling regulations of that nature, when facing death, is an appalling prospect, and it is, then perhaps we can use that fact as a catalyst. One to motivate ourselves to act to protect family from being exposed to pension benefit failure when we depart. Simply because we couldn’t be bothered setting things right, while we still had the time.
