28th June 2021
Well how cheery a topic is that; but knowing ‘what happens my pension when I die’ is a pretty incredibly important question. This is obvious when we realise that our pensions will or are going to be potentially a bigger asset in euro-terms than our homes! In this weeks’ episode of this award-winning Finance Blog I’ll share:
If you build your pension to the levels we referred to in Blog 176 (Podcast 222 to Tribe Members), you’ll need to know what’s what here! As eluded to above, the manner in which your pension is dealt with on your death depends on the type of pension structure you hold on the date of death. It is yet another anomaly in Irish Pension legislation that different structures are treated differently. In fairness, I should probably be campaigning for these complexities to continue as it ensures that Independent Financial Advisors like I continue to be in demand! I can guarantee you, if I didn’t specialise in these areas, I think I too would be a life-time getting my head around the weird and wonderful rules that exist in pension and revenue rules!
So here goes, the treatment on death of the main forms of pension structure/location:
Occupational Pension Scheme (Defined Contribution or Self-Administered Scheme)- while an employee of that company:
If you die while your pension is valued at less than 4-times your annual Gross Salary, the full value goes to your estate as cash. In addition, Trustees of the scheme are allowed to pay out any contributions you made as an Employee to your estate as cash.
If the value of the scheme assets is more than 4-times your annual salary, the Trustees are only allowed to pay out 4-times your salary from the pot value, plus any contributions you made to the scheme. If there is any pot left after having paid those sums out as cash, the balance must be used to buy an annuity for your survivors. Awful outcome really.
Occupational Pension Scheme (Defined Contribution or Self-Administered Scheme) – having left employment of that company):
As your employment has ceased, the Trustees of the scheme are not bound by the daft 4-times salary rule, and the full value of your pot can be paid to your estate as cash. Yay!
Occupational Pension Scheme (Defined Contribution or Self-Administered Scheme) – while still an employee but having passed Normal Retirement Age!:
Now we are getting into the weeds a bit! It is not noted anywhere in any Pension or Revenue Manual that I have studied, but have verified with Pensions Large Case Division in Revenue – their take was that the full value of the scheme could be paid out as cash to your estate, avoiding the 4-times rule. Another yay!
Occupational Pension Scheme with Defined Benefit Scheme:
Quite often there is a ‘death in service’ benefit of 4-times your salary which is a separate benefit your estate will receive as a cash lump sum. On top of that, many Defined Benefit schemes also promise to pay your survivor a percentage of the pension benefit you were going to be entitled to – provided you are an employee at the time of death.
If you have left the employment but still retain some ‘preserved benefit/service’ in the Defined Benefit scheme – all bets are usually off! They typically will pay to your estate a fairly modest equivalent lump sum of cash that their Actuaries work out. Best to die while in service if you have a DB to be honest!
Personal Retirement Bond (PRB) aka Buy-Out-Bond (BOB):
Another nuanced one! Technically, if you are still an employee of a company with which you have a PRB or BOB, that structure, plus the value of your main scheme (SSAS for example) are subject to the 4-times rule. Like a lot of things, there is a lot of grey area here, and some Trustees will tell you that they will pay out the PRB/BOB in full as cash, and only apply the 4-times rule to the main scheme values – but the rules, I believe, are pretty clear on this one.
On the other hand, if you have a PRB/BOB relating to an employment that you are no longer in, the full value of the PRB/BOB is paid in full to your estate as cash.
Personal Retirement Savings Account (PRSA):
Pension Manual is very clear here – if you die, the full value of your PRSA is paid to your estate as cash no matter employment status or otherwise.
Approved Retirement Fund (ARF) and/or Approved Minimum Retirement Fund:
The great thing about an ARF (in my opinion) is that when you die with an ARF, your survivor essentially steps into your shoes, and receives the taxable ARF income that you were receiving – and they can invest/ amend/increase/decrease/take lump sums etc. from the scheme, the very same as you used to be able to, when you were alive!
Also, when your survivor dies (assuming there was a survivor), the value of the scheme passes to your estate as cash. Interestingly, the taxation of that, if it is passing to children of yours, will depend on their age! If they are under 21, they CAT/inheritance tax at 33%, but if they are over 21, they pay ‘Income Tax’ at a fixed rate of only 30%!
This is where it can get messy! If you buy an annuity you’ll get an income until you die. It will be a desperately bad rate of income due to the current annuity rates being offered (c2.5% of your pot per year until you die, indexing at only 1% per year!), but an income none-the-less! If you buy a ‘Single Life’ Annuity, when you die, all bets are off, your pot is gone, the insurance company (the house) keeps the balance essentially, and your survivor receives nothing.
If you buy a ‘Joint Life’ Annuity, (from which you might get c2% of your pot per year with indexing at 1% per year!) when you die, the insurance company are committed to paying a portion of what you were receiving from them, to your survivor every year. As a result of this increased ‘risk’ for the insurance company, the annuity rate for a ‘Joint Life’ Annuity is even more appalling than the ‘Single Life’ rate at present. Awful bloody yokes at the current rates really!
Hopefully that answers the question about What Happens My Pension When I Die? Yikes, that’s enough death for one week surely!?
I’ve mentioned before that I use a variety of avenues for my own investments, bit via an online platform, a tiny bit with old-school Stock Brokers (not by choice), and bulk via index funds on a regulated Irish Platform, accessing passive index funds.
I really like the first and the last of those three that I use. The middle, the ‘old school stock broker’ account I have as a result of the shares I still currently hold in my previous employer through the Share Ownership Scheme are now administered by Mercer, a goliath of global stock broking.
Taking my own advice, as soon as the last tiny portion of shares vested, I recently sold shares I had held in my previous employer. In order to do so I completed the documentation and sent it in. It was only when the distribution was completed did I receive a statement to confirm that on top of the €108 ‘administration fee’ for selling at date of the month which doesn’t coincide with a full-moon, I also was charged €76.50 ‘Stockbroker Commission’. A total of €184.50 in fees to the ‘broker’ for carry-out a sell instruction on a hand-ful of shares valued at a Gross €1499.
My sale was obviously on tiny number of shares and that skews the numbers here obviously, but the fact remains, I just paid an equivalent 12.3% just to transact a sale of a number of shares. I spend lots of my time trying to ensure my own clients get value for money – that they get what they pay for – that the percentage fees they pay are as optimal as they can be made, sometimes finding or savings 0.1% here or there for a client, never mind 1%, never mind 12.3%! This was a stark reminder to me how very differently we approach things for our clients. It also reminds me of the positive difference we try to make in how we operate as a combination of investment counsellors and financial planners to the people that choose to work with us.
It would seem incredulous to think that a company would pick such services for their employees and former employees to use, and to pay these fees. But I guess, what viable and palatable alternative do they currently have. Ultimately, ten years from now, I sincerely hope that the alternatives open to us all allows instant (or close to it) trading at a fair and reasonable price (given that it is purely transactional)!
While it has nothing to do with What Happens My Pension When I Die, a short story if I may!? As the prospect of more hopping into the car and heading off camping etc becomes a reality, I brought the family wagon to get a new set of tyres recently. There is a local family run tyre centre near us who we’ve used for years. No frills, but the best quality tyres at very competitive prices. I asked the owner what Michelin tyres they had in stock in our tyre size. She mentioned they had Michelin ePrimacy. I took a minute to google them and check reviews and wear/wet ratings (another rabbit hole you might enjoy – check out this AutoCar article!).
Michelin ePrimacy tyre is A-rated for energy efficiency, and a respectable B-rated for Wet Grip, so fairly suited to these fair shores! In addition, they are the world’s first carbon-neutral car tyre (at the point of purchase). Michelin have claimed that title on the basis that they have offset the CO2 emissions in partnership with Livelihoods Carbon Funds. More on these types of funds soon – they are a sort of ‘3rd class citizen’ when it comes to individuals and businesses being environmental – more on ESG investing in the near future!
But my point here is that by investing in mainstream companies, we are enabling and supporting this shift. It really is a simple case of the great companies of the world becoming more and more environmentally responsible, or they will cease to exist. If they do survive, chances are they will not remain in the top-flight of companies that make up our index funds! They will simply drop out of the index we might be invested in, replaced by another more innovative and environmentally active companies. As index investors we are contributing to the gradual shift towards companies being more and more environmentally conscious.
More on ESG Investing (or Extra Stupid Governance as Nick Lincoln refers to is as!!) in an upcoming episode.
In summary, my advice is that you spend/use/gift/enjoy your money while your alive. From a technical perspective, that removes the need to worry about what happens my pension when I die!! The end.
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