Without being too morbid, the question of what happens to my pension if I die is asked frequently. Furthermore, your pension will likely be one of your largest assets so it is important to understand its inheritability.

Additionally, your pension could play a pivotal role in providing for your family or a spouse that is left behind. Having your ducks in a row might help make a difficult time even slightly easier.

There are certain rules and stipulations depending on what type of pension you have. In this blog, we will discuss the different permutations and outcomes associated with different types of pensions.

To keep things as simple as possible, we have broken it into two main sections, to begin with, which are:

what happens to my pension if I die
Discuss Your Pension

Pre Retirement

The different types of pension arrangements we look at in pre-retirement will have similar rules. Although, the inheritability of a pension will always be affected by the individual scheme rules.

If you are unsure of anything always enlist the help of a qualified professional.

Personal Pension

If you have a personal pension and die before benefits are taken, the full value of the plan is paid gross to your estate. An alternative option is the fund could be used to provide a spouse’s pension.

The tax implications would be as follows:

  • Spouse – No tax implications.
  • Children – Inheritance tax may apply depending on the amount and thresholds.
  • Cohabitating Partner – May be liable to tax depending on the amount and thresholds.

The Revenue website provides specific information regarding inheritance tax.

PRSA

Again, similar to personal pensions, if you die before retirement benefits are taken, the full value of your PRSA is paid gross to your estate.

You will also have an alternative option of a spouse’s pension.

As above, beneficiaries will be liable to inheritance tax. Although, there is no inheritance tax between spouses or civil partners.

It is worth noting that pension income is subject to income tax and USC in the hands of the spouse.

In the case of a Vested PRSA, they are treated the same as ARFs on death.

Personal Retirement Bond (PRB)

On death, your PRB will be treated the same as a personal pension or PRSA.

If an employee continues in the same employment and rejoins a company pension scheme then benefits are paid under the company scheme death in service rules.

Occupational - Defined Contribution Scheme

If you die while part of your employer’s Defined Contribution (DC) scheme, the value of your pension pot may be payable to your estate.

Death in Service

The maximum lump sum that can be provided is 4 times the final salary at the date of death. This will include any death benefits from company pension schemes from earlier employments.

Death benefits from personal pensions or PRSAs will not be included.

Beneficiaries will be liable to inheritance tax. Although, spouses and civil partners will be exempt.

Deferred Member

If you have left service and have a preserved benefit, the full value of your pension plan is paid gross to your estate.

The usual inheritance tax rules will apply as per above.

Post-Retirement

If you pass away post-retirement, your pension benefits may be in either an annuity or an ARF/AMRF.

Below we break down each along with how they may be inherited. It is worth noting, with anything tax-related you should consult a qualified professional.

Taxation differs dramatically even from pension rules and regulations.

Annuities

Death following the drawdown of an Annuity

 An annuity gives the policy owner the guarantee of a specific income for life. There are three types of annuities which are:-

    • Single-Life – This will provide you with a guaranteed income only for you for the rest of your life.
    • Joint-Life – If you have someone who relies on you financially, it may be worth considering a joint-life annuity option.
    • Enhanced – This is where the life insurance company will assess your health and give a quote based on that data.

In the majority of cases, the annuity contact will die with the contract owner. However, in some cases such as joint-life, a spouse or dependant may be entitled to benefits after you die.

Choosing a spouse/civil partner annuity pension ensures that, should you die before your named spouse/civil partner, a person will be paid to them for the remainder of their life.

You may also have the option of choosing a guaranteed period. This means should you die during that period, your pension continues to pay out for that chosen period.

Often this will be over 10 years. Should you die in year one, your pension will pay the remaining nine years.

ARF/AMRF

Death while holding an ARF/AMRF

If you are the holder of an ARF or AMRF pension when you die, the remaining funds are inheritable by your spouse/civil partner or other beneficiaries.

If you leave your ARF to a spouse or civil partner, they are eligible to transfer the funds to an ARF in their own name tax-free. They will not be liable to Capital Acquisitions Tax (CAT) nor income tax.

However, any subsequent withdrawals from their ARF will be liable to income tax and PRSI/USC where relevant.

If you chose to leave your ARF funds to any other beneficiaries, they may have to pay income tax or CAT. It will be dependent on their relationship to you and circumstances.

ARF/AMRF - Inherhittbility and tax liabilities

ARF/AMRF Inherited by? Income Tax Liability CAT Liability 
Transfer to ARF in name of surviving spouse/civil partner No

However, subsequent withdrawals subject to PAYE

No
Directly by your surviving spouse or civil partner. (not transferred to an ARF) Yes

Subject to PAYE and treated as your taxable income your year of death.

No
Child – Under 21 No Yes.

CAT at 33% applies to any part of the inheritance over the child’s available tax-free threshold amount. (currently a maximum €225,00)

Child – Over 21 Yes

Fixed-rate of 30%

No
Any other person Yes.

Subject to PAYE and treated as your taxable income in your year of death.

Yes.

CAT at 33% applies to any part of the net inheritance over the beneficiary available tax-free threshold amount.

Are pensions liable to inheritance tax?

As the saying goes, death and taxes are the only certainties in life. When you die your pension will be no different. However, your relationship with the person passing you benefits, and the scheme type are two important factors.

Any benefits emerging from a pension on the death of a member will likely have Captial Acquisitions Tax (CAT) and/or income tax liabilities.

Below we look at the inheritability of pension lump sums and ARF/AMRF’s in more detail.

Pension Lump Sum

Receiving a lump sum will be subject to Capital Acquisitions Tax (CAT) at 33%. Although, there are some exceptions:-

Spouses/Civil Partners

Under current pension legislation, spouses and civil partners are exempt from CAT on inheriting pension benefits. This also applies to those who are divorced or have their civil partnership dissolved.

Spouses and civil partners will pension benefits are liable to USC and income tax during the course of payment. However, they are not liable to PRSI deductions.

ARF/AMRF’s

The inheritability surrounding your ARF will depend on your relationship with the individual who has died. We have broken it down into the following scenarios:

Distribution to a Spouse/Civil Partner

This is where your ARF is transferred from the deceased to a spouse/civil partner. You effectively replace them as the owner of the ARF.

In this instance, you will not be liable to CAT or income tax. However, as you begin to withdraw income from the pension you will be subject to income tax.

Distribution to Children

Rules surrounding the distribution of an ARF to children will be dependent on their age. 

The child is 21 or older
Subject to income tax (30%) Yes
Capital Acquisitions Tax (CAT) No

As we see from the table above, the child inheriting the benefits being over 21 years of age will be a huge factor.

Now let us look at the example where the child is under the age of 21.

The child under 21 years of age
Subject to income tax (30%) No
Capital Acquisitions Tax (CAT) Yes 

When liable to Capital Acquisitions Tax, there are certain thresholds to be taken into account. 

If an ARF is distributed to anyone other than a spouse or child, then the benefits will be subject to income tax at the marginal rate of 41% along with CAT.

Capital Acquisitions Tax - Thresholds

Capital Acquisitions Tax is a tax on gifts and inheritances. These gifts or inheritance are taxed if they’re over a certain limit or threshold.

As we see below, the relationship between the disponer and beneficiary will have an impact on the threshold limit.

Group Relationship to disponer Threshold
1 Son/Daughter €335,000
2 Parent/Brother/Sister/Neice/Nephew/Grandchild €32,500
3 Relationship other than Group A or B €16,250

(source:www.revenue.ie

Capital Acquisitions Tax is currently charged at 33% on gifts or inheritances over the above thresholds.

For example, if you received €1 million from your parents, your tax bill would look like the following.

Amount Received €1million
Exempt from CAT €335,000
Remaining  €665,000
CAT Rate 33%
Tax Liability €219,450

It is worth noting that any tax liability must be paid before you receive any inheritance.

Conclusions

Any situation surrounding death is never easy. However, hopefully, this has provided a little more clarity of how it may affect your pension.

If you have a pension you are concerned about, take time and arrange to speak with an expert who can discuss all options.

The rules and regulations surrounding how benefits are inherited can be tricky. It is best to discuss everything in simple English. 

Everyone’s situation and circumstances will be different. Look at your whole financial situation and how your pension will fit in.

Taxation can also be overwhelming. Take time and look at all possible options.

If anything is unclear, we would be happy to help.

You can use the live chat box, leave your information in the contact box, or give us a call.

Pension Support Line Team

Phone – 01 890 3518

Email info@pensionsupportline.ie

This blog should be used for informational purposes only. It should not be regarded as financial advice.

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*This blog should be used for information only and not taken as financial advice.

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