What Happens to Your Pension When You Die?

Are you thinking about what will happen to your pension when you pass away? Pensions are an important part of your financial planning, giving you an income for your retirement.

Many people aren’t sure what happens to these funds when they’re no longer here.

Whether you have a state pension, a personal pension or a member of a company pension scheme, it’s important to understand what happens to your pension after you’re gone.

Pensions can provide comfort, knowing that your loved ones will be supported financially. However, the rules about what happens to your pension can be confusing and depend on the type of pension you have and the choices you’ve made about your beneficiaries.

In this blog, we’ll explore the different things that can happen to your pension after death, explain how your choices affect your loved ones, and offer simple steps to help secure their future.

Understanding who can benefit from your pension after you die is crucial for ensuring that your loved ones are taken care of. Beneficiaries and dependents are the two main groups who may receive benefits from your pension.

In a pension, beneficiaries are typically the first in line to receive the pension benefits after your death. This usually includes your spouse, or children. However, it’s important to note that beneficiaries do not necessarily have to be financially dependent on you.

Dependants are individuals who are financially dependent on you, such as children or other family members who rely on your income. Dependants often receive a portion of your pension or salary that you would have received at retirement age.

To ensure that your dependants receive these benefits, it’s essential to keep your pension provider informed about their identities.

The fate of your pension if you die before retirement depends largely on the type of pension plan you have.

If you hold personal pensions, Personal Retirement Savings Accounts (PRSAs), Personal Retirement Bonds (PRBs), or executive pensions, the full value of the fund typically passes to your estate upon your death.

The pension is effectively closed, and its cash value is transferred to your estate to be distributed according to the instructions in your will.

To ensure your wishes are clearly followed, it’s crucial to have an up-to-date will in place. 

Normal rules on inheritance will apply. Spouses and civil partners pay no inheritance or gift tax. 

All other relationships will have limits on the amount that can be inherited. Read more here.

For workplace pensions you need to carefully examine the rules of the pension scheme you are enrolled in. There can be a lot of variance in how pension funds can be handled.

If you die while still employed, your pension fund is typically paid to your estate.

However, certain conditions could apply, such as a cap on lump-sum payments and potential withholding of employer contributions if you die shortly after entering the scheme.

Additionally, death-in-service benefits may change the final value of the fund transferred to your estate.

It is essential to seek clear guidance and advice to understand how your workplace pension will be handled in the event of your death.

If you pass away, your spouse or estate is not entitled to your State Pension, as the entitlement ends upon your death.

However, your spouse or civil partner may apply for the Widow’s, Widower’s, or Surviving Civil Partner’s (Contributory) Pension, subject to certain eligibility conditions.

If both you and your spouse/partner are entitled to separate State Pensions, your spouse/partner will only receive their own pension payment.

Careful planning is essential to address this. In retirement, if you pass away before your spouse or partner, your household could potentially lose up to €14,640 annually in income.

When it comes to other pensions, there are options for how they can be inherited. However, many of these decisions are made when transitioning your pension from pre-retirement to post-retirement products.

It’s vital to understand the inheritance rules for the two primary post-retirement products: Annuities and Approved Retirement Funds (ARFs).

Getting informed now can help you make the best choices for your loved ones’ future.

Annuities provide a guaranteed income for life, which can be a great source of financial stability in retirement. However, when it comes to inheritance, they can be a bit complex.

With an annuity, you can choose to nominate your spouse or partner to receive a portion of your pension after your death.

If this option is selected, the annuity can be transferred to them. However, it’s important to note that they may not receive the full amount – it’s typically a percentage of the regular annuity payment.

Many annuities also include a guaranteed payment period option, ensuring the income continues for a specific time even after your passing.

Very Important: These decisions must be made when you initially set up the annuity, as changes cannot be made once the plan has started.

If you’re considering an annuity as part of your retirement plan, it’s crucial to fully understand how it will affect your dependents and beneficiaries after your death.

Taking the time to plan now can make a big difference for your loved ones later.

Approved Retirement Funds (ARFs) make inheritance much simpler. You can leave the full value of an ARF directly to your spouse, allowing them to transfer it into their own ARF without having to paying any tax.

If the ARF is transferred to your estate, the beneficiaries might be liable for inheritance tax or income tax, depending on the circumstances.

For adult children over 21, inheriting an ARF comes with a income tax liability. Children under 21 are exempt from this income tax but may still need to pay inheritance tax.

Understanding these rules can help you plan effectively to ensure your loved ones benefit as much as possible.