Key Post How are pension funds and ARFs taxed after a person dies

[Brendan Burgess]

There seems to be a lot of confusion over this. I don't have any direct experience so I will draft this key post and correct it based on feedback.

The first objective is to clarify the tax treatment. Only after that is done, will we discuss the planning points.

PRSA before retirement; Personal Retirement Bond; Personal Pension
On death before retirement, it forms part of the estate and subject to CAT in the hands of the recipient. ( So if a wife gets it, no CAT. If a child gets it, subject to the €400k lifetime exemption)

Vested PRSA / Approved Retirement Fund
When one retires, one can take out 25% of the PRSA tax-free and leave the remainder in the PRSA - when it's known as a vested PRSA or move it into an Approved Retirement Fund.

The tax treatment is the same.
If it is left to the spouse, the spouse steps into the PRSA. They are taxed in the normal way - i.e. Income Tax as they draw it down.

If the ARF is left to a child under 21, it is subject to CAT in the normal way.

If the ARF is left to a child over 21, it is subject to Income Tax at 30%

If it goes to anyone else...
- the estate will pay income tax on it at the deceased tax rate at the time of death. (I presume that this means that it is added to their income for the tax year and taxed accordingly.) So if it's a large ARF it will be taxed at 50% - Income Tax, PRSI and USC
- the recipient will pay CAT on the net amount received
(Is this correct? ???)

 

[Brendan Burgess]

I have moved the posts on Death in Service to a separate thread.

 

[Brendan Burgess]

Coming back to this, what are the planning points around this?

It seems that in every case, you are better off deferring converting your pension to an ARF.

However, you should convert some of your pension to an ARF and drawdown enough each year to maximise the 20% tax credits.

If you are married
Defer converting your pension fund into an ARF or Vested PRSA for as long as possible.
Specify in your will that your spouse is to get your pension fund.
Why: Because your spouse will get the pension fund tax-free whereas she steps into your shoes in the ARF and will pay Income Tax on drawdown as you would have.

If you are leaving your estate to your children under the age of 21
It makes no difference. But although your children may be under 21 when you write your will, they may be over 21 by the time you die so plan as if they will be.

If you are leaving your estate to your children over the age of 21

They will be subject to CAT on the pension but 30% Income Tax on the ARF.

If you are leaving them each at least €400k, it doesn't matter much which you do.

But if they still have their €400k CAT threshold to use up, they are better off receiving your pension fund.

If you are leaving your estate to anyone else, a pension fund is much more attractive than an ARF

The pension fund forms part of your estate and the beneficiary will pay CAT in the normal way.
So if you leave a pension fund worth €900k, your beneficiary will receive about €600k after 33% CAT

If you leave an ARF worth €900k
Your estate will pay 50% Income Taxes on it, leaving the estate with €450k
The beneficiary will receive €450k and pay 33% CAT so will receive a net €300k

 

[Sarenco]

If your spouse inherited your personal pension, wouldn’t she have to retire the pension and create an ARF/purchase an annuity to draw down any funds?

There may be edge cases where it is advantageous for a spouse to inherit a pension rather than an ARF but I don’t think I would elevate it to a rule of thumb for planning purposes.

 

[Brendan Burgess]

If your spouse inherited your personal pension, wouldn’t she have to retire the pension and create an ARF/purchase an annuity to draw down any funds?

I don't know the rules. I understood from my research that a personal pension just forms part of your estate. But I am open to being corrected.

Maybe a PRSA forms part of your estate, while a personal pension must be ARFed?

From the Pensions Authority
What happens if I die before I retire?


If you die before you retire, your PRSA fund will be transferred to your estate, but your heir(s) may have to pay inheritance tax before receiving it.

and
Death before retirement

Should you die before you have taken a benefit from your RAC, then the value of your retirement fund is payable to your estate.


For example:

What Happens To Your Pension Plan When You Die? - True Wealth

In this blog, we'll explore what happens to your pension when you die, whether before or after retirement.

truewealth.ie

In the absence of nominated beneficiaries, the value of your pension fund will be directed to your estate.