In our role as Financial Advisors, a key plank of any plan is to fund for a comfortable retirement. The unfortunate reality is that sometimes people die before they draw down their retirement benefits, or shortly afterwards. The purpose of this blog is to give a broad overview of what happens to your pension when you die.
In the first instance, this depends on whether you have drawn down benefits from your pension or not. Let us first look at the treatment of pre-retirement pensions, i.e. those that have not been drawn down before death.
If you have a Personal Pension Plan or a PRSA, this is paid in full as a lump sum to your estate, and distributed in accordance with your will. There is no income tax liability, but there may be inheritance tax depending on who ultimately inherits the proceeds (there is no inheritance tax if your spouse inherits).
If you are a former member of a company pension scheme, or have moved these benefits to a Personal Retirement Bond, these would be treated as ‘preserved benefits’ and are paid to your estate, and distributed in accordance with your will. As before, there may be an inheritance tax liability depending on who ultimately inherits the proceeds.
If you are a member of a current employer pension scheme, and die in service, then your retirement fund, plus any additional life assurance cover held by the scheme on you, will be used by the scheme trustees to provide benefits as follows:
- a lump sum of up to 4 times your remuneration, plus the value of any contributions you paid to the scheme, will be paid to your estate and/or directly to one of your spouse/civil partner, children, or others.
- any balance of your fund over the amount paid out as a lump sum above must be used to buy annuities for your spouse/civil partner and others who are financially dependent on you at the date of death.
Now, we will deal with the treatment of post-retirement pensions, where someone has retired and has drawn down benefits.
Where someone has an annuity (a guaranteed income payable for life), this can either cease on the death of the annuitant, or pass to a spouse at a reduced level. This will depend on the type of annuity, and there is also a guaranteed payment period for all annuities, typically 5 years.
Where someone has drawn down pension benefits, taken a tax-free lump sum, and moved the remainder into an Approved Retirement Fund (ARF) then the treatment of this on death ultimately depends on who the ARF passes to. Depending on whether the ARF passes to your spouse directly, to an ARF in your spouse’s name, to children under 21, or to children over 21, there are varying levels of inheritance tax or income tax.
As with all Financial Planning matters, quality and bespoke advice is essential.
We would be delighted to meet with you and discuss your current arrangements and offer an opinion on them, or work with you to recommend the most appropriate course of action for you and your family. Please feel free to reach out to me at email@example.com to start the conversation.