Retirement planning is often focused on building a pension fund and creating an income for later life. However, an equally important part of financial planning is understanding what happens to your retirement assets when you die.
For holders of an Approved Retirement Fund (ARF), the tax treatment on death can vary considerably depending on who ultimately receives the money.
Understanding these rules and planning for them in advance can help ensure that more of your accumulated wealth reaches the people you intend to benefit.
If your spouse or civil partner inherits
A surviving spouse or registered civil partner has favourable options.
They can generally take ownership of the ARF and keep the money invested. No CAT arises on the transfer, although future withdrawals will be subject to Income Tax, PRSI and USC in the hands of the surviving spouse or civil partner.
What happens when children inherit?
The position is different for children, and age is particularly important.
Where a child under 21 receives the proceeds of an ARF, the payment may be subject to CAT at 33% on amounts exceeding the available Group A threshold.
For a child aged over 21, the treatment changes. CAT does not apply to the ARF payment, but a flat 30% income tax charge applies instead.
Children receive the value or proceeds of the ARF rather than inheriting the ARF itself.
This distinction is important when parents are considering how their pension assets fit into their wider estate and inheritance plans.
Other beneficiaries can face a significant tax bill
Tax can become more complicated when an ARF is left to someone other than a spouse, civil partner or child.
The fund may first be payable to the estate after Income Tax, PRSI and USC. The beneficiary may then also face CAT on the net inheritance, depending on their relationship with the deceased and the relevant CAT threshold available to them.
Could a Section 72 policy help?
One potential planning solution is a Section 72 life assurance policy.
A qualifying Section 72 policy is specifically designed to provide funds towards an inheritance tax liability arising on death. Importantly for ARF planning, qualifying section 72 policy proceeds can be used towards tax arising on an ARF, including the 30% tax liability where an ARF passes to a child over 21.
Of course, a Section 72 policy will not be appropriate in every situation. The amount of cover, cost, beneficiaries, structure of the estate and likely future tax liability all need to be considered. Starting this conversation earlier can provide more options than leaving inheritance planning until later life.
Planning ahead matters
ARFs should form part of your overall estate plan, alongside your home, savings, investments, other pensions and life assurance.
A valid Will, reflecting your current wishes, is a vital part of the estate planning process. If you die without leaving a Will your estate will be divided in accordance with the Succession Act. You should talk to a solicitor if you do not have a valid Will or if your Will needs to be updated.
Tax rules, thresholds and personal circumstances can change. Current rules should always be confirmed before taking action. Speaking with a financial advisor can help you understand how your ARF fits into your wider estate, identify potential tax exposures and assess whether solutions such as Section 72 cover may be appropriate.
Here to help you navigate your way to financial security
Good financial planning is not simply about accumulating wealth. It is also about having a clear plan for passing that wealth to the next generation as efficiently as possible.
The Milestone Advisory team are qualified financial services consultants. We specialise in helping professionals in the construction sector and related industries. Our team will work with you to review your finances, explaining your options in clear English.
No jargon – just the facts.
For more information, contact Darragh Hogan darragh@milestoneadvisory.ie.
