Protecting the Capital in Your Pension – What happens to your Pension if you die before retirement?
Directors and Executives of companies who have reasonable levels of pension funding are discovering that the Revenue’s rules for payment of benefits in the event of death in service lead to a significant reduction in the perceived value of their pension fund. This can happen for two reasons:
1. The pension fund is paid to a life assurance company to buy an annuity for your dependants; or
2. The pension fund can be returned to the employing company as a trading receipt in certain circumstances.
How can this happen?
This happens because:
- The Approved Retirement Fund (ARF) option which is available on retirement is not available on death in service. Also, many employers provide an insurance benefit on death in service.
- The insurance benefits usually cover the tax free lump sum amount (i.e. up to four times salary) – any additional cover, along with the pension fund, are used to purchase an annuity.
- There is a maximum amount the Revenue will allow an employer provide on death in service. If your pension fund, when added to the insurance benefits goes over this amount the surplus pension fund will be returned to your employer.
Let’s look at some examples of how this works in practice.
Impact of Annuity Purchase
Joe, aged 50, is married to Jane. Joe has a salary of €100,000 per annum.
Impact of Annuity Purchase
How do I know if this will affect me and what should I do to
avoid it?
Each person’s circumstances are different. We will provide a full review of your benefits payable of Death in Service and recommend steps you might take to protect the capital value of your pension fund.
What can I expect from the review?
We will review all aspects of your current situation and recommend, where possible, a solution designed to your personal circumstances which will aim to:
• Maintain the current level of insurance coverage.
• Maintain the current level of pension funding.
• Maximise the amount of benefit that can be paid tax free.
• Ensure the minimum amount is paid to purchase an annuity.
• Ensure the minimum amount possible is repaid to the employer.
How do I find out more?
The next step is to speak to Harvest Financial Services who will review your circumstances. If you have a potential issue in the event of death in service, the technical consultants in Harvest Trustees will be engaged *2 to review your circumstances and recommend steps you can take to mitigate this risk.
*2 The fee for this service can be paid from your pension fund.
Call us on 01 2375500 or email justask@harvestfinancial.ie