When we think about pensions and investments, the focus is usually on building wealth especially for retirement. But what happens when you’re gone? Estate planning is often overlooked, yet it’s a crucial part of ensuring your hard-earned assets benefit the people you care about most. It is often assumed that pensions and investments will automatically pass to those we leave behind. But without proper planning, there may be unnecessary delays, unforeseen tax liabilities, or even disputes. Here we look at how pensions and investments are treated on death and the practical steps to reduce any burden on your heirs.
HOW PENSIONS ARE PASSED ON
The rules around pensions after death vary depending on the type of arrangement:
Defined Contribution (DC) pensions: If you pass away before retirement, the value of your pension pot is usually payable as a lump sum to your nominated beneficiaries. After retirement, the options depend on whether you’ve taken an annuity, Approved Retirement Fund (ARF), or other structure.
Defined Benefit (DB) pensions: These often provide a survivor’s pension to a spouse or dependent, but the benefit is generally fixed by scheme rules rather than your own choice.
ARFs and AMRFs: These allow greater flexibility. On death, your fund can transfer to your spouse’s ARF tax-efficiently, or to children (with different tax treatments depending on their age).
Because each pension vehicle comes with its own rules, it’s essential to review what you hold and confirm how benefits would be distributed. Most pension schemes allow you to complete an Expression of Wish or Beneficiary Nomination Form. This indicates who you would like to receive your pension benefits on death.
With an occupational pension scheme, the trustees usually have discretion over the distribution, but your nomination is highly influential. Whereas for a personal pension or PRSA arrangement, your nomination typically directs the provider on where benefits go. Make sure you also update nominations after major life events, marriage, divorce, children. Out of date nominations are the one of the most common causes of disputes.
TAX TREATMENT ON INHERITED PENSIONS & INVESTMENTS
Tax is often the most misunderstood aspect of inheritance. Spouses and civil partners can usually inherit pension or investment assets with little or no tax liability.
Children under 21 can often receive pension proceeds tax-free, while children over 21 may face tax on ARF transfers, or Capital Acquisitions Tax (CAT) depending on the circumstances. Other beneficiaries (siblings, nieces/nephews, friends) may face CAT once thresholds are exceeded. You can find out more about inheritance tax here.
Investments held outside pensions form part of your estate and are subject to normal inheritance tax rules. Effective planning using gift exemptions and other means can significantly reduce the final liability.
REDUCING THE BURDEN ON YOUR HEIRS
There are some practical steps you can take to ensure your wealth is distributed to those you wish. First keep your will up to date and ensure it reflects your current wishes and family situation. Complete your pension nominations, check them regularly and keep copies safe. Consider your post-retirement options carefully, an ARF provides greater flexibility in both your retirement and how funds are passed on. Use all available exemptions and thresholds.
NEXT STEPS
Estate planning isn’t just for the wealthy. If you have a pension, savings, or investments, you already have an estate worth protecting. Making informed choices today ensures that your loved ones inherit in the smoothest, most tax-efficient way possible. Get in touch with us today and we can help you integrate your pensions, investments and tax planning into a coherent estate plan that reflects your wishes.