What Happens to My Pension When I Die?

Although it’s never a particularly pleasant train of thought, our eventual demise is an inevitable factor that should not be overlooked when reviewing financial matters. After all, when it comes to money, you can’t take it with you! What happens to your pension on death is not necessarily a cut-and-dried forgone conclusion. It can depend on a number of things;

• the type of scheme you hold,

• whether that scheme is pre or post-retirement,

• who survives you on death,

• or even what country your pension is held in.

There are so many variables that can influence how your funds are distributed in the event of your passing, and the following is a high-level description of each scenario.

Occupational Pension Scheme

While you may have spent your working life amassing a comfortable pension pot, it is not guaranteed that the entire fund will seamlessly pass on to your estate if you pass away while still in employment. If an active member of an occupational pension scheme dies before reaching their normal retirement age (NRA), the benefit payable to that individual’s nominated beneficiary is a lump sum not exceeding the greater of €6,350 or four times final remuneration.

In addition, a refund of any contributions made to the scheme by the employee directly can also be paid as a lump sum to the estate. The funds may remain in the scheme for a maximum of two years before being paid out. Any assets held within the pension must be liquidated in order to make funds available to pay out the lump sum. There is no income tax charge, but Capital Acquisitions Tax (CAT) at 33% may apply.

Any balance left over following the payment of the above lump sum must be used to purchase an annuity, or since 2021, transferred to an ARF.

Buy-Out Bond (BOB)

A Buy-Out Bond (otherwise known as a Personal retirement Bond or PRB) is a scheme that receives a transfer of benefits from an occupational pension scheme where an employee leaves their previous employment or the occupational pension scheme is being wound up. It cannot accept new contributions. On death of the member, typically the full fund is brought to cash and paid out to the member’s estate. As per the Occupational Scheme, there is no income tax charge, but CAT may apply.

PRSA

A Personal Retirement Savings Account (PRSA) is a type of personal pension that can be funded by an individual and/or their employer. A PRSA can accept contributions and transfers from occupational pension schemes. It cannot however receive a transfer from a Buy-Out Bond.

Like the BOB above, if a PRSA holder dies before accessing their benefits, the full value of the fund is brought to cash and paid to the estate. Once again, there is no income tax charge but CAT may apply.

Vested PRSA or ARF

Following the retirement of a scheme and the transfer to an Approved Retirement Fund (ARF) or a Vested PRSA, the treatment of the fund is dependent on the terms of the deceased’s will or the application of the intestacy rules if there is no will.

If the ARF is passing to a spouse or a civil partner, they can “step into the shoes” of the deceased and the full fund can transfer to a new ARF in their name. This allows any investments in the scheme to be retained to continue to provide returns. In this way, a property, say, that was owned by a husband’s ARF can transfer into a wife’s ARF and continue to provide benefits into the future. There is no income tax or CAT on the transfer to the new ARF. Any drawdowns of income by the surviving spouse or civil partner from the new ARF will be subject to income tax.

If the surviving spouse or civil partner wishes to take the benefits as a lump sum rather than setting up an ARF in their own name, the distribution will be subject to income tax at the deceased’s marginal tax rate (but not CAT).

If benefits are passing to children of the deceased, the tax treatment differs depending on the age of the child.

• For children under age 21 at the time of death, there is no income tax due however CAT does apply.

• For children aged 21 and over there is a flat 30% income tax charge, but no CAT applies.

If the fund is inherited by anyone else not listed above, they will be subject to income tax at the deceased’s marginal tax rate, as well as CAT.

Capital Acquisitions Tax Thresholds

The tax-free amount receivable by your beneficiaries before being subject to 33% Capital Acquisitions Tax depends on their relationship to you.

• Your spouse or civil partner is exempt from CAT.

• Any children can currently receive up to €420,000 tax free before CAT is applied. This includes adopted children or step-children, as well as any minor grandchildren where their parent is deceased. This is known as Group A.

• The threshold drops to €44,000 for siblings, nieces and nephews, grandchildren, and parents, grandparents, and any other direct ascendant. This is Group B.

• The third and final threshold, Group C, is for friends, cousins, or any other relationship not included in Groups A or B, and is set at €22,000.

Overseas

The jurisdiction of where your pension is located is also a factor worth considering. For example, when a pension is held in Malta it is paid to a nominee on death without going through probate. All proceeds are typically paid gross and managed by the recipient in their country of tax residency.

Conclusion

Given the myriad of scenarios and variables, it can understandably feel overwhelming trying to make sense of it all. Knowing what type of pension(s) you have is key. While it may be tempting to put it off, speaking to your financial and legal advisors will help you better understand your options and be able to put your mind at ease.

Stephen Doyle - ITC Business Development Manager