When it comes to pensions, it is becoming increasingly important that we do not just ask our clients what they have in their pension pot but more significantly what type of pension is their pension pot in? As the pension rules can result in dramatically different outcome for clients.
Pension Types in Ireland
People are surprised to know that in Ireland we have the following pension arrangements:
Personal Pensions Buy Out Bonds
Personal Retirement Savings Accounts Approved Retirement Funds
Defined Contribution Plans Annuities
Defined Benefit Plans Additional Voluntary Contributions
Small Self-Administered Schemes
Each of these pension types have different rules as to how the benefits are paid in the event of the death of the member and it important to understand the rules as they apply to your pension pot.
Rules on Death after Retirement
First of all, I am fond of saying to my clients that one will only die in two places. They will either die before they retire or after they retire. Therefore, that is always the first question worth considering. Have you retired all or some of your benefits? Of the arrangements mentioned above only two of them are post retirement vehicles, namely Annuities and the Approved Retirement Funds (ARF).
Annuities can often die with the member (if they are single life for example) and rarely have the ability to be passed on to adult children (unless in full time education).
ARFs though have the ability to be passed on to next of kin in their entirety including all the capital to adult children. The ARF is much more of an asset than the Annuity as it will pass on to your beneficiaries, where it is often said the Annuity will die along with the second spouse.
Rules on Death before Retirement
All of the other arrangements are pre-retirement vehicles with one little exception and that is the Personal Retirement Savings Account (PRSA). The PRSA is the only one that can be used in both pre and post retirement.
So why is it important for you to know what type of pension you are in? The answer is explained in the following table that tries to simplify what benefits are paid on death:
So if I have €1m in my PRSA, in the event of my death my surviving spouse will receive that €1m tax free. If I have €1m in my Defined Contribution Scheme and my salary is €50,000 then my surviving spouse would receive €200,000 tax free and the €800,000 would have to be used to purchase an annuity. Annuity rates today in Ireland for a 50 year old female are circa 2.6%. That would be a pension of around €20,800 per annum. which benefit would you prefer? Most would say the €1m tax free because of the flexibility it would bring and the ability to spend more in the early years when children are younger, and more funds are needed to get them reared and on the “ladder of life”.
Understanding the treatment of your pension in the event of your death will help you put in place an estate plan that provides for your beneficiaries in line with your wishes.
Author: Derek Ryan, Director, Smith & Williamson Pensioneer Trustees Limited http://smithandwilliamson.com/en-ie