For members of occupational pension schemes, the maximum lump sum payable on the death of a member is four times final salary plus the value of the member’s contributions and AVC’s. Any amount over this had to be used to purchase an annuity.
This meant that not many schemes with death in service benefits went over four times salary in cover (almost all schemes ignore the fact that the value of the employer’s contribution to the pension scheme is added to the lump sum, so most schemes will provide over four times salary).
While the annuity did not have to be at the time of death, annuities are no longer an attractive option to most people who prefer to have control over their money and the opportunity to pass it onto their children.
As well as abolishing the AMRF, the Financial Bill 2021 also introduced the Approved Retirement Fund (ARF) as an option for any amount over four times salary from a death in service benefit. This change has not been publicised much but it makes a huge difference to the surviving spouse in the case of death before retirement.
Instead of Micheal having €400,000 death in service benefit for his €100,000 salary, his employer provides him with 10 times salary, so he has cover of €1,000,000. Michael is in a road traffic accident and dies at the age of 50.
Previously, his wife Roisin would have received €400,000 lump sum. As having to purchase an annuity was an unattractive option, most employers didn’t offer anything over that limit. But let’s say they did and the had cover of €1,000,000. For the €600,000, a 50 year old Roisin would receive €22,740 a year from the annuity. She has to live to 76 years of age to just get her money back.
Under the new rules, she can put the €600,000 into an ARF. She can access this money at any time if she wishes but does not have to take any money out until imputed distribution starts at age 61. Assuming 4% growth of her ARF over that period, it will accumulate to €923,672 in value by the age of 61.
And unlike the annuity, the ARF will not die with Roisin. She can leave it to her children.
It makes perfect sense for schemes, including the one person Executive Term cover plans to load up over the old four times salary amounts.
Steven Barrett
27 March 2023