What happens to your pension after you die? What happens to your parents’ pensions when they die? What happens to your spouse or partner’s pensions? It’s a grim but very important topic. So here’s a simplified summary of what happens to pensions after death. And because pensions are so unnecessarily complicated and drowning in jargon, I think the best way to approach this is by pension type, before and after retirement.
Death before Retirement
Company Pension
If the holder was still employed, the family may get a cash lump sum death-in-service payout (of up to four times salary). They can also then receive either a percentage of an annual annuity payment (defined benefit schemes) or the value of the pension fund is cashed out and paid to the estate (defined contribution schemes).
PRSAs / PRBs / Personal Pensions
The full fund values of all other pensions transfer tax-free to the estate. If it then goes to a surviving spouse, no inheritance tax is payable, but if it goes to the children then it is subject to inheritance tax.
Death after Retirement
Company Pension
At this point a lump sum will most likely already have been taken and the pension has converted either into an annual annuity payment (of which a pre-defined percentage goes to the beneficiary if pre-contracted) or an invested ARF pension fund (which either passes in full into the name of the surviving spouse or is encashed and paid to the estate after deduction of income tax).
PRSAs / PRBs / Personal Pensions
If any of these ‘other ‘pension types have not yet been accessed (ie, they are not yet ARFs or Annuities) then the fund value transfers tax-free to the estate. If it then goes to a surviving spouse, no inheritance tax is payable, but if it goes to the children then it is subject to inheritance tax. But if they have switched into annuities then a pre-defined percentage continues to be paid to the beneficiary. But if they switched into ARFs then the funds either pass in full into the name of the surviving spouse or are encashed and paid to the estate after deduction of income tax.
For much more on this, have a look at the Pensions Authority website.
And if you’ve liked this article I’d recommend this one … Making a Will