What Happens To Your Pension Plan When You Die?
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Although death is an inevitable part of life’s journey, its timing and circumstances often remain uncertain.
Despite this universal truth, many of us tend to overlook the importance of preparing for the inevitable, leaving unanswered questions about what happens to our assets, including our pension plans, and how our loved ones will be provided for in our absence.
In this blog, we’ll explore what happens to your pension when you die, whether before or after retirement.
Our goal is to help you understand these important topics so you can make smart choices for your money and your loved ones’ future.
What happens if you die before retirement?
Personal Retirement Savings Account (PRSA)
If you have a PRSA and pass away before retirement, the funds within your pension account will be paid to your designated beneficiaries if you have made such nominations.
In the absence of nominated beneficiaries, the value of your pension fund will be directed to your estate.
Your dependents may have to pay inheritance tax, depending on who inherits the fund.
Read our article to gain insight into Personal Retirement Savings Accounts (PRSAs) and acquire the knowledge needed to make informed decisions about your retirement savings.
Personal Retirement Bond (PRB)
Similarly, if you have a PRB and pass away before retirement, the distribution of your pension benefits will depend on whether you’ve nominated beneficiaries.
Designated beneficiaries will receive the PRB fund, while without a nomination, it becomes part of your estate.
Your family members might need to pay inheritance tax, depending on who gets the money from your pension fund.
Occupational Pension
If your employer provides your pension and you pass away while still working for them, your pension fund will be given to your estate based on a “surrender value.”
This means your estate will receive the total value of both your and your employer’s contributions to the pension fund.
However, there are specific conditions outlined by Revenue rules regarding pension payments:
- A lump sum of up to four times your salary, along with any contributions made to the pension fund, can be paid out in cash. This includes considering lump sum payments from previous employments.
- If the total value of the pension exceeds this limit, the remaining funds can be used to purchase a pension for your spouse.
- In certain situations, pension schemes may withhold employer contributions from your estate if you die within two years of joining the scheme.
- If you have multiple pensions from different organisations, your estate will receive all the funds, even if you haven’t transferred them to a buy-out bond or consolidated them into a single scheme.
It’s essential to review the specific terms of your occupational pension scheme to understand the entitlements for your beneficiaries.
If you’re ever uncertain about anything, it’s always a good idea to seek assistance from one of our financial advisors at True Wealth.
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What happens if you die after retirement?
Annuities
If you’ve chosen an annuity option for your pension and pass away after retirement, the fate of your pension benefits depends on the annuity arrangement you’ve selected.
Single Life Annuity
With a single-life annuity, if you haven’t chosen a guaranteed payment period, your pension payments will cease upon your death.
Joint Life Annuity
If you have a designated dependent who depends on your financial support, you might consider a ‘joint life’ annuity.
This option ensures that your designated dependent continues to receive a pension income for the rest of their life if you pass away before them.
You can choose the percentage of your pension income that your designated dependent will receive, ranging from 100% down to as low as 20%. Opting for this choice will result in a lower pension income for you.
It’s important to consider your spouse’s or dependents’ needs when selecting an annuity option.
Guaranteed Payment Periods
If you have annuities with guaranteed payment periods and you pass away within that period, your pension income will continue to be paid to your designated dependent or personal legal representative, following the same payment frequency as it was paid to you.
Usually, as a standard, there is a minimum one-year guaranteed payment period. However, you have the flexibility to select a different guaranteed payment period. Options include:
- 2 years
- 3 years
- 4 years
- 5 years
- 10 years
Find out additional information about pension annuities by reading our article: Retirement Income For Your Whole Life.
Approved Retirement Fund (ARF)
One of the main distinctions between an ARF and an annuity lies in the ownership of the retirement funds.
With an ARF, the funds belong to you personally. Consequently, upon your passing, you have the option to pass on the funds in your ARF to your next of kin or other chosen beneficiaries.
If you choose to leave your ARF to your spouse or civil partner, they have the option to transfer the funds to an ARF in their own name.
In all other cases, the ARF is wound up and the proceeds are distributed to your estate.
Any applicable income tax must be deducted before the proceeds are disbursed to your estate.
If you want further insights about ARFs, read our article, What is an approved retirement fund?
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Is my pension subject to inheritance tax?
The amount of tax on your inherited pension is specific to you and depends mostly on your relationship with the beneficiary and the type of pension plan you have chosen.
Tax liabilities associated with your situation typically adhere to income tax or Capital Acquisition Tax regulations.
Pension Lump Sums
Receiving a lump sum is typically subject to Capital Acquisitions Tax (CAT) at a rate of 33% (as of February 2024).
Spouses/Civil Partners
According to current pension laws, spouses and civil partners are not subject to CAT when inheriting pension benefits. This exemption also extends to divorced individuals or those whose civil partnerships have ended.
While spouses and civil partners receiving pension benefits are subject to USC and income tax upon receipt, they are not liable for PRSI deductions.
Other Relationships
Inheritance tax, or Capital Acquisitions Tax (CAT), varies based on the relationship between the deceased and the beneficiary, categorised into different threshold groups.
Group A, covering children, has the highest threshold at €335,000.
Group B, including parents and siblings, has a lower threshold of €32,500.
Group C, encompassing other relationships, has the smallest threshold at €16,250.
These thresholds highlight the importance of understanding inheritance tax implications when planning pension inheritance to mitigate tax burdens for beneficiaries.
ARF’s
Inheritance considerations for your ARF depend on your relationship with the deceased. Below are the scenarios:
Transfer to a Spouse/Civil Partner:
If the ARF is passed to a spouse/civil partner, they become the new owner. In this case, they are not liable for Capital Acquisitions Tax (CAT) or income tax. However, when they start withdrawing income from the pension, income tax will apply.
Transfer to Children
Children over the age of 21 are subject to a flat rate of 30% income tax. On the other hand, children under the age of 21 are exempt from income tax.
However, they may still be liable for Capital Acquisitions Tax (CAT) depending on the inheritance amount.
Transfer to other beneficiaries
If someone other than your spouse or child inherits your ARF fund, they will be responsible for paying both income tax and Capital Acquisitions Tax (CAT).
Annuities
Income tax and/or inheritance tax may apply to all death benefits paid out under an annuity.
Get a Retirement and Pension Planning Quote With True Wealth
Consulting with one of our financial advisors at True Wealth ensures that your retirement plans align with your broader estate planning objectives, thus safeguarding the financial well-being of your loved ones.
We’re here to help you by providing advice on the best strategies and addressing all your retirement and pension planning needs.
Gain valuable insights by exploring our Retirement Planning Guide, offering comprehensive knowledge to help you navigate the intricacies of retirement planning and pensions.
Furthermore, we encourage you to explore our article that explains what happens with your pension upon leaving your job.
We are also experts in personal and business protection, savings and investments, pension tracing, personal and business financial planning, mortgages, and wealth management and extraction.
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All our content has been written or overseen by a qualified financial advisor. However, you should always seek individual financial advice for your unique circumstances.
