What happens to my pension benefits if I suffer death in service? (die while being an employee and a member of the company pension scheme!). On a regular basis, we help clients to manage their pension planning, so as to avoid potential pitfalls in this area. Reason being, it has the potential to have a hugely negative impact on one’s financial future.

What you’ll learn:

• How Personal Pension assets are treated on death (with a simple example!)
• How Company Pension assets are treated on death (with worked example)
• How you can plan around the current rules for pensions in death in service

It’s easy to think that after years of diligently contributing to a pension that it will all pass to your estate in a simple manner, and to loved ones. While Revenue has removed some ridiculous rules, it isn’t always straightforward. And it can become nuanced when an active member of an occupational pension scheme suffers a death in service.

Personal Pensions (PRSA) Death Benefits

We recently hosted a great webinar, where the former Head of Pensions Department in Revenue gave us his take on recent changes to PRSAs, and the opportunities around the same.

It was only after the event that my brother, who watched the webinar, asked me ‘Why didn’t yee friggin explain what a PRSA was??’. And he was right, in my eagerness to share our experts’ knowledge, we didn’t address the basics!

A PRSA is simply a form of pension, which you would typically buy/set up if you had no access to a pension scheme in your job, or if you are self-employed via a limited company or sole trader.

It is apparent that Revenue view PRSAs as the future of all pension schemes, and they are slowly but surely streamlining all the various pension schemes down to PRSAs. I reckon, in a few years, you’ll be able to have any type of pension scheme you like, as long as it’s a PRSA! And no harm either.

If you have a PRSA with money/assets in it, and you die (while working or not), the treatment of the assets in that pension fund is pretty straightforward.

Simply put, the entire fund will go to your estate. For example, if you have a PRSA or multiple PRSAs (you can have as many as you like!) with a value of €1 million, the entire €1m cash value will go to your estate, tax-free (not forgetting that there may be CAT tax liability for whoever gets these assets, per CAT rules).

This straightforward treatment doesn’t only apply to PRSAs.

It also applies to a Buy Out Bond (BOB), also known as Personal Retirement Bond (PRB). Full value passes to your estate. It also applies to an Occupational Pension scheme (company scheme), but only if you are no longer an employee or member of the scheme.

This is all great and gives you peace of mind that your loved ones won’t miss out on accessing the full benefits that you worked and saved so hard to build.

However, where we currently see potential issues and nasty surprises arising is with how an Occupational Pension scheme assets are dealt with if you die while still an employee (death in service). This is not as straightforward as the above scenarios…

Death In Service from an Occupational Company Pension Scheme

As things currently stand, death in service as a member of an occupational scheme, means your full assets do not pass to your estate.

The current rule stated in Revenue’s Pension Manual, Chapter 10 states: “Where an employee dies in service before normal retirement age (NRA), a lump sum not exceeding the greater of €6,350 or four times the deceased employee’s final remuneration may be provided.”

In addition to that lump sum, any contributions to the scheme that the employee made, can be refunded as a lump sum to the estate.

The aspect that can surprise some folk with what happens is the balance of the scheme assets!

So How Do Death in Service Benefits Work?

Up until 2021, the balance of the scheme assets had to be used to buy an annuity for a surviving spouse or partner, or dependant. (see example below). This might not sound terrible but it wasn’t necessarily the most financially beneficial to the recipient (particularly when annuity rates were shockingly bad!).

Let’s say at the time if you died while an employee, with €1.2m in the occupational pension scheme, and a salary of €120k. And you had contributed €300k to the scheme over your years of service.

The lump sum payable to estate:

4 Times Salary = €480,000

Refund Contributions = €300,000

Total Lump Paid = €780,000 (which is not insignificant of course!)

However, the balance of your pension assets, some €420,000, instead of being paid out to your estate as tax-free cash, had to be handed over to an insurance company, which would pay your survivor an annuity for every year that he or she lives.

That €420,000 lump sum was gone into thin air, in return for an annuity income, and your survivor had no say. It was the rules! And if that had happened in the past 10 years, annuity rates were c2%, so he or she would have got c€8,400 taxable annuity income per year.

He or she would have to live a very long time to recoup the full €420k! It wasn’t a great outcome at all. But all that has changed thankfully, somewhat!

Finance Act 2021 Changes:

Thanks to the 2021 Finance Act, the treatment of pension benefits from an Occupational Pension scheme is now slightly different.

The 2021 Finance Act allowed for another option with the excess (the €420k in the above example). The recipient (spouse/partner/dependants) can now use the €420,000 to either buy an annuity, or invest in an Approved Retirement Fund (ARF).

The latter (ARF) provides more flexibility when it comes to drawing down the pension income. And in recent years has been far more favourable in terms of drawing an income. It allows for when the spouse dies, any assets still in the ARF pass onto the estate for the beneficiaries. The insurance company doesn’t keep them!

Read here for more about how ARFs work (Blog 115) and draw-down strategies for Approved Retirement Funds (Blog 147).

Using ARF Instead of Annuity for Death In Service

One should note that annuity rates have climbed back up, along with interest rates. This now makes them a viable option again for people to consider, before they run into the arms of their ARF provider! Let’s look at the ARF route to receive the excess pension assets above the lump sum payment.

Again, if you died while an employee, with €1.2m in the occupational pension scheme, and a salary of €120k. Let’s say you had contributed €300k to the scheme over your years of service.

The lump sum payable to estate:

4 Times Salary = €480,000

Refund Contributions = €300,000

Total Lump Paid = €780,000

Again, the balance of your pension assets is €420,000. You decide to invest in an ARF. Keeping things simple, let’s assume that your survivor (Sam) is 55 years of age, and wants to start drawing the regular income, at 4% per year.

Sam receives €16,800 per year taxable income. When Sam reaches 71, that income has to increase to a minimum of 5% per year, or €21,000 Gross Income.

And if Sam dies at any point and there is still money in the ARF, it passes to Sam’s beneficiaries via estate as a cash lump sum. The assets are retained, and not swept into the insurance company coffers.

It is great that the ARF option and the annuity option are both available now. It will hopefully only be a matter of time before they add the ‘transfer as cash’ option to one’s death in service.

Death In Service Pension Solutions

While the solutions to avoiding the current death in service pension rules can be complex, there are some simple considerations to ensure your beneficiaries are better off. 

The key things to do are:

• Be prepared well in advance with a solid financial plan
• Keep track of your Occupational Pension value so you know when the 4 times salary may have a negative impact
• Note your dependants on your Occupational Scheme. (Email the trustees or scheme administrator today to get these noted – most people have not done this!)
• Explore if PRSA or PRB are viable options for some of your benefits to ‘ring-fence’ them against the 4-times rule. Of course, only viable provided you can get decent fees/performance/service/security via the new PRSA/PRB
• Instead of transferring old schemes into current occupational schemes (particularly if it will throw your values way over the lump sum entitlements), consider if PRSA or PRB is more effective for you
• Don’t die!

I hope this helps, and that it was put in a way that was understandable and readable 🙂

Thanks,

Paddy.