I’m interested to understand what happens my pension when I die. I have a pension which is invested in a rental property and would like to ask: what happens to the subject property on the death of the pension beneficiary and their spouse? Can it be passed down, by will, together with the rest of the estate, or are there separate considerations relating to it?

– T Moran, Co Laois

There’s a revolution coming in pensions – a revolution that’s been brewing for over twenty years.

It was in 1999 that pension freedoms were introduced in Ireland, with the creation of Approved Retirement Funds.

Unlike the annuity pensions that preceded them, ARFs offer huge choice over where to invest and how to draw income.  Crucially, they don’t go up in smoke when you die: they can be inherited.

And as most of us can hope to live at least twenty years in retirement, the great wave of pension inheritances is only starting to happen.

That’s why the coming generation is in line for a fatter inheritance than many that have gone before.  So how should you plan for it?

In general, the same rules apply to SSAPS as for other work pensions.  But the practicalities can work differently.

There are a few scenarios here, so we’ll take them in turn.

The first is the least likely, where the pension holder dies before retirement.

In this case, up to four times salary can be paid out from the pension to the estate.  AVCs and personal contributions can also be paid out (although in a SSAPS there mightn’t be any of those).

An annuity for the spouse (or dependents) must be purchased with the remainder of the pension.

From the perspective of a SSAPS holder, this is pretty unattractive.  It means liquidating the rental property due to the need for cash, and buying an annuity, which offers little flexibility or control.

A far more likely scenario is that you retire and transfer your rental property into a self-administered ARF.  From this point on, with careful planning, there’s no need to sell your property asset.

Instead, your ARF forms part of your estate.  From here, it depends who inherits.

The simplest, and most common situation is that the pension is transferred into a new ARF for the surviving spouse.

Here, there’s no need to dispose of the property.  All assets move across with relatively little admin, and no tax charge.

It’s more complicated where children or others inherit your ARF.  Tax of some kind will apply, and there might be a need to split the pension among several beneficiaries.

But that doesn’t mean your property must be sold.  Instead, taxes could be settled using other assets, and ownership of the property asset could be split among several beneficiaries.  That avoids your estate becoming a forced seller of an illiquid asset like property.

Of course, that means you’ll need other, more liquid assets like bonds and equities as part of your estate as well.

Happily, holding a diverse range of assets in your pension is a wise approach for retirement income, as well as a sound plan for those who will inherit.  Even after the revolution, some principles still hold true.

 

This article is adapted from a piece we recently wrote for the Sunday Times.  You can read the original article here.

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