Key Post Defined Contribution Fund - What happens to it if you die..?

[Klopp to it]

Hi

I've been wondering what happens to a DC fund if the person dies before retiring ?

For arguements sake, say the unlucky individual had €500k in a fund and dies at 50 before retiring?

Also, are employee contributions treated any differently to employer contributions in the above scenarios...?

Moderators's note: I have moved the bit about ARFs to :

Key Post - What happens an ARF when a person dies

This has come up a few times and I want to understand the rules and the correct strategy in drafting a will. If the ARF is left to the spouse There is no tax on the transfer to the spouse but the spouse gets the ARF and not cash. As they draw down the ARF, they pay income tax in the normal...

www.askaboutmoney.com

 

[Steven Barrett]

Personal pensions, PRSA's, Buy Out Bonds and retained benefits

are all paid out tax free.

Current occupational pension benefits

pay up to 4 times salary plus personal contributions.

The remainder must purchase an annuity but you can defer when this is bought if you wish.




Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Klopp to it]

Personal pensions, PRSA's, Buy Out Bonds and retained benefits are all paid out tax free.

Thanks Sarenco & Steven - So if you die before retiring the DC fund balance is transferred to your spouse tax free...? Do they receive that directly tax free or is it still kept inside a pension wrapper and they pay tax as they drawdown...?

 

[Steven Barrett]

If you are a member of an occupational pension scheme, they get a lump sum of up to 4 times salary plus the value of any personal contributions directly tax free. Any remainder is used to purchase an annuity. If the value of the pension is less than 4 times salary, the full amount is paid tax free.

If you have old work pensions, the full amount is paid tax free.

If you have a PRSA or a personal pension, the full amount is paid tax free.



Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Brendan Burgess]

Hi Steven

I have made this a Key Post and have edited the posts accordingly.

What happens AVCs? I presume that they are paid out tax-free?

I presume that Retained Benefits is the value of a pension fund from an old employer which has not been converted to a Buy Out Bond or transferred to my current employer.

What happens if I transfer the value of my old pension fund to my current employer?

Brendan

 

[Steven Barrett]

Ok, there's a few parts to this, so I have broken it up

What happens AVCs? I presume that they are paid out tax-free?

AVC's are paid out tax free and do not count as part of the 4 times salary lump sum payment.

I presume that Retained Benefits is the value of a pension fund from an old employer which has not been converted to a Buy Out Bond or transferred to my current employer.

Retained benefits are basically an inactive pension. That is if you leave it in your old employer scheme or transfer to a Buy Out Bond. A Buy Out Bond is a pension vehicle designed to hold old work pensions. They are specific to one period of employment (you cannot put two pensions from two different employers into a Buy Out Bond). So if you transfer the benefits to a Buy Out Bond, the proceeds will be paid tax free.

What happens if I transfer the value of my old pension fund to my current employer?

If you transfer your pension benefits to your current employer scheme, it becomes part of that scheme and is subject to its rules. Therefore the 4 times salary rule applies to the benefits that have transferred in. In the case of the Aer Lingus scheme where employees had their benefits cut, people who had transferred in benefits from another scheme, also had the value of that transfer value cut too...as it was now part of the Aer Lingus scheme.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Brendan Burgess]

Hi Steven

That is great thanks. Are these planning points correct?


Do not transfer a DC scheme to another DC scheme

You can receive the old DC scheme completely tax-free if you die.

(This post is about Defined Contribution Schemes so I won't worry about people in DB schemes.)

Pensions schemes are treated more favourably than ARFs so you should consider deferring taking an ARF as long as possible

It is better to die with a pension scheme than with an ARF.

If you have a terminal illness, max your pension contributions

You get tax relief at either 20% or 40% and your beneficiaries get it tax-free (subject to CAT)

 

[Steven Barrett]

Again, not straight forward

Do not transfer a DC scheme to another DC scheme

You can receive the old DC scheme completely tax-free if you die.

(This post is about Defined Contribution Schemes so I won't worry about people in DB schemes.)

You may join a new scheme that is wholly paid for by your employer and is much cheaper than the old scheme or which you can get from a Buy Out Bond.

When you transfer your old benefits to a new scheme, your time served also transfers. This is relevant regarding the 2 years vesting requirements. So say you start a role in a company but don't really like it. Transfer your retained benefits into this scheme so you will have the 2 years vesting and be entitled to the employer contributions before you hand in your notice.

Pensions schemes are treated more favourably than ARFs so you should consider deferring taking an ARF as long as possible

It is better to die with a pension scheme than with an ARF.

Remember, PRSA's and personal pensions are always paid out tax free. That is why there is no harm in having a number of different pension plans, you can mature them at different times.

If you have a terminal illness, max your pension contributions

You get tax relief at either 20% or 40% and your beneficiaries get it tax-free (subject to CAT)

If part of a scheme, it is under trust and the trustees will decide where the money goes, so it is not subject to CAT.

If under a PRSA or personal pension, the fund is paid out tax free. In practical terms though, will the terminally ill person have pensionable income to make a pension contribution or be working at all?


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[elacsaplau]

Hi Brendan,

There are a few errors above. (Sorry I hit post prematurely - see next post!)

 

[elacsaplau]

Sorry about previous post and I've given up trying to work out how to quote when in edit!! Anyway,......

If you are a member of an occupational pension scheme, they get a lump sum of up to 4 times salary plus the value of any personal contributions directly tax free. Any remainder is used to purchase an annuity. If the value of the pension is less than 4 times salary, the full amount is paid tax free.

If you have old work pensions, the full amount is paid tax free.

If you have a PRSA or a personal pension, the full amount is paid tax free.

Where a lump sum of 4 times salary is payable, then retained/preserved death benefits from employer sponsored DC schemes do need to be taken into account. See Death Benefits section of Revenue Pensions manual for more detail but of specific note is that legacy lump sum benefits from previous occupational schemes must be taken into account whereas legacy PRSAs/personal pensions do not! Go figure! Some really mad stuff in all of this......like you can ignore legacy benefits from previous occupational schemes if the lump sum from the current employer is 2 x Salary!! Honest!

If part of a scheme, it is under trust and the trustees will decide where the money goes, so it is not subject to CAT.

With limited exceptions (e.g. certain ARF distributions upon death) lump sum payments upon death are subject to CAT!! Whether, and to what extent, CAT is payable depends on the relationship between the deceased and the recipient. Crucially, the fact that certain payments are paid out at the discretion of trustees of the occupational pension scheme does not alter the CAT provisions.


[At a general level, there is mad additional tax planning stuff here but alas I forget the detail - potentially this could be a hugely significant thread - especially for those with challenging health outlooks!]

 

[Steven Barrett]

Sorry about previous post and I've given up trying to work out how to quote when in edit!! Anyway,......



Where a lump sum of 4 times salary is payable, then retained/preserved death benefits from employer sponsored DC schemes do need to be taken into account. See Death Benefits section of Revenue Pensions manual for more detail but of specific note is that legacy lump sum benefits from previous occupational schemes must be taken into account whereas legacy PRSAs/personal pensions do not! Go figure! Some really mad stuff in all of this......like you can ignore legacy benefits from previous occupational schemes if the lump sum from the current employer is 2 x Salary!! Honest!

I have double checked this. This applies if the benefits are not preserved. Benefits become preserved when:

1. They have completed at least 2 years pensionable service
2. The relevant employment has ceased or
3. their employment does not terminate but the scheme ceases to be "related to that employment" e.g. the scheme is frozen and not replaced, the scheme is wound up and not replaced or the member has opted terminate their membership of the scheme.

You are correct on the CAT issue of the payment of the value. It is paid to the estate. I was going to say I am open to correction on this issue, thanks for clarifying



Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[elacsaplau]

Hi Steven,

I was once a trustee of some occupational pension schemes in Ireland and elsewhere. So I'm relatively familiar with this stuff as we had some unfortunate cases. I recognise that it's all mad stuff. We'll eventually iron out the wrinkles here!

In relation to your point that the conditions mentioned in my previous post only apply if the benefits are not preserved, the first para of Section 3 of Chapter 10 of the Revenue Manual seems to be saying the opposite? Can you double-double check or explain please?

In relation to the CAT issue - some death benefits are paid to the estate BUT lump sum death-in-service benefits, under a trust based occupational pension scheme, are payable at the discretion of the trustees and do not need to be - but certainly can be - paid to the estate! [You will be aware, for example, that the letter of wishes of members is designed to inform but not obligate the trustees in the exercise of their discretion. If death benefits only went to the estate, letters of wishes would be redundant.] The point I was trying to make is that such payments may or may not be liable for CAT depending upon the relationship between the deceased and the recipient.

 

[Brendan Burgess]

Folks - the clue is in the title. This thread is about Defined Contribution pension schemes.

If you post about Defined Benefit pension schemes, your post will be deleted. Two posts have been deleted so far.

This is a complicated topic and it's important to stay focused.

Of course, anyone is free to start a new thread on DB pension schemes.

Brendan

 

[Brendan Burgess]

Here is an interesting article by Tony Gilhawley on the area in general

[broken link removed]

 

[Klopp to it]

Delighted to see my thread had garnered some responses since and just wanted to see if I could clarify the issue with some made up figures.

Say John Smith has a DC fund of €500,000 of which he has contributed €300,000 and employer contributions are €200,000. His annual salary is €75,000.

Assuming he dies before retiring, i.e. while in service and still working, what would be the amounts involved for his spouse to inherit, and what taxes, if any, are payable.