Saturday 17 August 2019

How to ensure children get pension if parent dies young

Your questions answered

'There may be ways to access all of the pension funds in the event of death in a more tax-efficient manner than to just retire the benefits — thus preserving your pension fund where possible for the future benefit of your children' Stock image
'There may be ways to access all of the pension funds in the event of death in a more tax-efficient manner than to just retire the benefits — thus preserving your pension fund where possible for the future benefit of your children' Stock image

Rachel Reid

Q I have been paying into a defined contribution (DC) pension scheme for more than 30 years. My husband died when he was young - and so it has been up to me to provide for our four children since. I am worried about what will happen to my pension pot if I die before I retire. How can I ensure that my pension pot goes to my children if I die before I retire? Margaret, Dublin 3

I am assuming that you are still a member of the DC pension scheme. I have also assumed that there are no explicit risk benefits attaching to the scheme - in other words, that it is purely a pension-funded arrangement.

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Under current Revenue Commissioners rules, in the event of death in service, the surrender value of your plan - which would include the employer and employee contributions, and any additional voluntary contributions (AVCs) you may have made - will be paid out in cash to your estate. However, there are rules pertaining to the distribution of the surrender value.

Under Revenue Commissioners rules, the amount which can be paid out in cash from your pension when you die is four times your salary (salary can also include an average of any bonuses you received over your working years), along with a refund of the employee premiums and AVCs - plus any investment gains on these premiums.

The lump sum payment would be distributed in accordance with your will, and under current legislation, payments to children and other beneficiaries are subject to the capital acquisitions tax (inheritance or gift tax) thresholds which apply to them.

If there are further funds remaining, these must be used to purchase an annuity for the listed beneficiaries.

You state you have four children - this means an annuity would be required for each child, not collectively.

These pensions are payable subject to income tax and the universal social charge in the course of payment - but they are not subject to PRSI.

It is therefore imperative that you make provisions in your will for how you wish your pension to be treated in the event of your death. Assuming that your DC scheme is set up under trust, I would also recommend that you submit a letter of wishes (a letter which acts as a guide to your trustees and executors to help ensure your personal wishes are carried out after your death) to the trustees, if you have not already done so. The trustees will take these wishes into consideration when dealing with the distribution of your pension, but they are not bound by them.

In the event of one becoming terminally ill during employment, I can't stress enough the importance of seeking financial advice prior to accessing the pension benefits. This is because there may be ways to access all of the pension funds in the event of death in a more tax-efficient manner than to just retire the benefits - thus preserving your pension fund where possible for the future benefit of your children.

Should your pension fund be greater than the cash lump sum which Revenue will permit to be paid, seek independent financial advice and explore the options possibly open to you - with an adviser acting on your behalf with the trustees.

Tax on 401k pension

Q Is a 401k pension plan that is cashed in over in the US taxable in Ireland? John, Co Roscommon

I do not know your personal circumstances - for example, how old you are, how long you had the 401k pension plan for, if you cashed the plan in fully, if you cashed it in prior to becoming tax- resident in Ireland, and indeed if you are tax-resident in Ireland now.

The treatment of 401ks can depend on a number of different factors. I am therefore assuming that you cashed the 401k plan in after you had reached the age of 59-and-a-half, that you had the plan for more than five years, that tax was deducted from the value of your 401k on encashing it in full in the United States, but that you were deemed to be resident in Ireland for tax purposes at the time you cashed in the plan.

Irish Revenue legislation states that foreign occupational pensions, that would not be subject to tax in the country that granted the pension if the recipient lived there, would be exempt from income tax in Ireland. However, this is not the case for 401k pension plans, as the contributions you paid into your 401k are tax-deferred and the plan is liable to tax on distribution.

The 401k is considered to be a defined contribution arrangement for pension purposes. Under Irish taxation rules, foreign pensions (including those from the US) are deemed a taxable source of income in Ireland - and are therefore liable to income tax and the universal social charge, but not PRSI.

You would therefore need to declare this pension income to the Revenue Commissioners through myaccount.ie or on a Form 12 tax form.

The income tax withheld in the US may provide you with a tax credit under the double taxation agreement between Ireland and the US - with either a further balance owing or a refund, depending on your other sources of income, and use of your personal tax credits in the tax year in question.

As you were the holder of a 401k pension plan, you would be deemed to be an individual with connections to the US. I would therefore suggest that you engage the services of a specialist US tax consultant or financial adviser in relation to your financial affairs.

PRSA investment woes

Q I am self-employed and recently set up a personal retirement savings account (PRSA). Last year, my PRSA contributions lost a third of their value - due to the poor investment performance of the pension fund they are going into. Should I cut my losses and close it? Sorcha, Co Sligo

A PRSA is a great way of saving for your future, and with the added benefit of tax relief at your marginal rate of income tax (20pc or 40pc), it makes good financial sense to use it as a savings vehicle. Like all pensions, PRSAs are long-term savings, and you need to move away from looking at a year or two's performance in isolation. Investment markets are volatile, and it is imperative that you are invested in funds which match your risk profile, rather than worrying about the performance over the short term.

Assuming you have an investment horizon of between five and seven years or more, a PRSA is a sound investment choice. It is important, however, that you have diversification - that is, you are not limited to one geographical area or asset class. You might be interested in taking a euro cost averaging approach.

With this approach, which is often suited to risk-adverse investors, you dripfeed the same amount of money into markets and/or funds on a monthly basis, rather than yearly. This allows you to buy more shares when prices are low and less when prices are high. So if markets fall, you are losing less money. If markets rise, you will enjoy the gains.

My advice is to continue to make the contributions, but consider the above points to ensure you are more comfortable with the process of how and when you invest.

Rachel Reid is a director with OpesFidelio (Telephone: 012724130)

Email your questions to  lmcbride@independent.ie or write to 'Your Questions,  Sunday Independent Business, 27-32 Talbot Street, Dublin 1'.

While we will endeavour to place your questions with the most appropriate expert for your query, this column is not intended to replace professional advice. 

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