I have written about the different type of pension plans before. They are mostly all the same i.e. a savings plan for retirement, but there are differences such as how much you can put into a particular plan . Another difference is what happens to your pension if you die. People are afraid that the insurance company will pocket the lot. That is far from the truth.
If you die before retirement, what happens to your pension fund very much depends on what type of pension fund you have.
Company Pension
If you are actively in a company pension scheme (it doesn’t matter if it is Defined Contribution of Defined Benefit), a lump sum of up to four times your salary may be paid to your estate, plus the return of the value of your own personal contributions and AVC’s.
A spouse’s pension must be purchased with any remainder of the fund.
If you are a deferred member i.e. you used to be in the scheme but left it, the entire value of the fund is paid to your estate as a lump sum if those benefits are still in the old plan or in a Buy Out Bond.
Company pensions are set up under trust, so the benefits do not have to go through probate and can be paid out quicker.
Personal Pensions
For personal pensions, the value of the pension may be used to purchase an annuity, or usually the full amount is paid as a lump sum to the individual’s personal representatives.
PRSA’s
For PRSA’s, the full value of the fund passes to the deceased’s estate. No Income Tax is charged but normal Inheritance Tax rules apply.
What happens to the value of your pension if you die after retirement very much depends on the choices you made when you matured your retirement fund.
Annuity
If you purchased an annuity at retirement, the fund will die with you unless you specified that you wanted to include a spouse’s pension at the outset. In most circumstances, the insurance company guarantees that the pension will be paid for a minimum of 5 years (but not in all cases). If a spouse’s pension was not chosen or if your spouse pre-deceases you, the insurance company keeps the rest of the money and uses it to fund those that live longer than expected.
ARF
If you invested your pension fund in an ARF, on death, it will pass to your spouse and become an ARF in their name. They pay income tax on any income that they take out of the fund.
You also have the option of leaving it to your children. If your children are over 21 years of age, they pay 30% income tax on the amount but it is not liable to CAT. If they are under 21, no income tax is liable but it is subject to CAT.
If you have any questions, please contact me directly at steven@bluewaterfp.ie