10 Ways to Protect the Pension Earmarked for Loved Ones

The first cuts to inheritance tax in more than a decade were unveiled in the Budget last October.

While much of the debate around inheritance tax is often focused on the family home, the Government’s cuts to inheritance tax could also benefit those who have built up valuable pensions over the course of their working lives – or more specifically, the loved ones they intend to leave those pensions to.

However, like any element of an inheritance pot, it is important to protect any pension earmarked for loved ones. Failure to do so could see the value of that pension seriously diminished by the time it is passed on – if indeed, it can be.

Here are ten steps that could help protect any pension you have in mind for loved ones when you pass away.

1. Choose a Pension That Can be Passed On

As you approach retirement, you typically need to decide between an annuity and an Approved Retirement Fund (ARF).

An ARF is a personal retirement fund where you can keep the money in your pension pot invested after retirement. An annuity is an annual pension you can buy with the money in your pension pot when you retire.

A big advantage of ARFs is that any money remaining in your ARF after your death can be left to your next of kin or family. This isn’t always the case with annuities as with some annuities, your pension simply stops when you die - even if you pass away shortly after retiring. For this reason, a guaranteed annuity is something you could consider if you wish to take an annuity rather than an ARF when you retire – but also wish to ensure your loved ones get the benefit of that annuity when you did. With a guaranteed annuity, your pension will continue to be paid to your estate for a certain amount of time (usually for either five or ten years) - even if you die shortly after buying your annuity. These annuities are more expensive than the ones which don't come with a guarantee - but they offer peace of mind.

Another useful option if you have family is a joint-survivor annuity - which is often bought by married couples. With these annuities, a pension continues to be paid to the surviving partner when either you or your spouse dies.

2. Include Your ARF in Your Will

If you opt for an ARF rather than an annuity, it is important that you specify in your will that you want your ARF to be left to your spouse and children – or whoever else you have it in mind for. Otherwise, the ARF will slide into the residue of the estate, and it may not be distributed as you had intended it to be.

3. Name Your Annuity Beneficiaries

If you have opted for an annuity rather than an ARF, and specifically, an annuity which will be paid to your surviving partner after you die, check that you have named the beneficiary or beneficiaries of your annuity in your annuity contract when buying it. In most cases, annuity funds pass to a named beneficiary or beneficiaries when you die - without the delays and costs of probate.

It would also be wise to inform the solicitor handling your will of the arrangements you have put in place in relation to your annuity and to provide him or her with a copy of your annuity contract.

4. Include Any PRSAs in Your Will

Personal Retirement Savings Accounts (PRSAs) have become more popular in recent years, and are a pension product often considered and used by the self-employed. As is the case with any pension product, those with PRSAs should understand what happens to the pension benefits built up in it after they die. With a PRSA, all funds go to the individual’s estate tax-free after they die, with beneficiaries subject to the usual inheritance tax rules.

However, like ARFs, it would be important for an individual to specify in a will that they want their vested PRSA left to their spouse or other family members. Otherwise, the vested PRSA could slip into the residue of the individual’s estate which may not necessarily be what the individual had intended.

5. Review Your Will Each Year

Be sure to review your will regularly and to update it where necessary – so that it reflects any changes to your circumstances – such as a marriage, divorce, the birth of children or the death of a loved one. This will help ensure your wishes around your pension – and other assets in your estate – are carried out when you pass away and ultimately go to the correct beneficiary or beneficiaries.

6. Leave Your ARF to Your Spouse

It is important that you do what you can to limit the tax bill faced by those that you pass your ARF onto. In this regard, people should carefully consider whether they should leave their ARF to their spouse alone rather than to both their spouse and children.

The most tax-efficient way to pass on an ARF is for it to transfer into an ARF in the name of a spouse or civil partner. Neither inheritance tax nor income tax are triggered for the spouse or civil partner in this instance, though the spouse or partner will pay income tax on any drawdowns from the ARF.

Should some or all of an ARF be left to a child, the tax treatment varies, depending on the age of the child. ARF benefits payable to a child under the age of 21 may be subject to inheritance tax, though no income tax will be due. ARF benefits payable to a child over the age of 21 are subject to income tax at a rate of 30pc, regardless of the size of the fund. However, inheritance tax is not payable.

7. Make Sure Your ARF Doesn’t Run Out of Money

Unlike an annuity, with an ARF, there is a risk that you could run out of money in retirement if you exhaust the money in the fund or if the wrong investment decisions are made around it.  You can withdraw money from your ARF regularly to give yourself an income when you retire but you need to do so in a way which doesn’t risk your ARF running out of money. Similarly, as the money in your pension pot is invested after you retire, it is susceptible to stock market movements. However, careful management of your ARF, as well as shrewd investment decisions around it, should reduce the risk of you exhausting your fund when drawing down from it and ensure it provides you with an income throughout your entire retirement – as well as hopefully leaving something to be passed onto your loved ones when you die too. It is important to get advice from a regulated pension advisor so the right decisions are made in this regard.

8. Don’t Overlook Any Death-in-Service Benefits

Those who have a pension at work should be sure not to overlook any death-in-service benefits they might have. With an occupational pension scheme, should you die while in service, a maximum lump sum of four times your salary can be paid to your estate tax-free, with any surplus going towards an annuity or ARF.

9. Don’t Lose Track of Any Pensions

People should ensure to have a full understanding of all the pension benefits they have built up over their lifetime when planning their estate. There may be pensions which were saved into in an individual’s early career which have been forgotten about or lost track of. Importantly, the money in a pension is held in trust so any money left in an old pension which has been forgotten about is still the pension holder’s money and still there. Hiring a qualified financial advisor can help track down old pensions. So too can the register of company pension schemes available from the pensions regulator, the Pensions Authority (pensionsauthority.ie).

10. Get Advice

Pensions are a complex area and so is estate planning. It’s important to get both legal and expert financial advice when planning how best to pass your pension onto loved ones.

Glenn Gaughran, ITC Head of Business Development and Marketing