What Happens to My Pension Scheme When I Die?

It is natural for us to shy away from conversations about our own demise, however, it is well worth considering how your pension benefits will be treated after your passing. This will allow you to take any necessary steps now to ensure that your intentions are met. The first step is to consult with your financial and legal advisors to consider your options.

How your pension benefits are treated upon your death will depend on the type of pension structure that you have. If you transfer your benefits to a different arrangement, then your instructions may need to be updated or you may have a number of arrangements which need to be considered separately.

Small Self-Administered Schemes (SSAS):
The distribution of funds from the SSAS on death before retirement will depend on whether the benefits are deemed to be active or preserved. 

In the case of active benefits (i.e., actively contributing to the SSAS), upon the death of the member, the fund is liquidated. A lump sum of 4 times the member’s final salary plus the value of any personal contributions is paid in accordance with the rules of the scheme. Any surplus remaining is used to purchase annuities for the member’s dependent(s). Any balance of the fund thereafter is returned to the employer as a refund of contributions. 

However, with preserved benefits (i.e., left employment or no longer actively contributing), the full value of the fund is liquidated and paid out to the estate.  

If the fund is no longer active you, together with your financial advisor, should consider making it preserved or ‘paid up’ to protect against the risk of being limited to the 4 times final salary lump sum on death. For example, if the fund value is €1.5m and the final salary is €50k, then the lump sum will be just €200k with the balance used to purchase annuities and/or to be refunded to the company. Alternatively, depending on your circumstances, it may be appropriate to transfer the benefits to a PRSA or a Buy Out Bond (BOB).

The recently introduced Finance Act 2021 allows the member’s dependants to purchase an ARF rather than an annuity which is a welcome development.

PRSA or BOB:
The full value of the fund is brought to cash and paid out to the estate to be distributed in accordance with the terms of the member’s will.

Approved Retirement Fund (ARF):
The treatment of an ARF will depend on the terms of the deceased’s will or the application of the intestacy rules if there is no will. 

It is possible for the member’s spouse to “step into the shoes” of the deceased. In this case, an ARF is established for the spouse and they can make investments and draw income from the ARF subject to the payment of income tax. Otherwise, it can be paid out to the beneficiaries and taxed in accordance with Revenue’s rules.

At present, the following tax treatment applies:

Now is the time to talk to your financial and legal advisors about how your pension benefits will be treated on your death and any measures that should be taken to ensure that your intentions are complied with.

Fiona Conroy
Head of ITC Legal

_{*Please note this content is the view of the author and not of Independent Trustee Company}