Saving enough of your hard-earned money into your pension to prepare for retirement is a good idea. But how do you protect what you have saved and make sure it goes to your family
The advantages of having a retirement fund include tax relief on your contributions, tax-free growth on its investment and you can take a tax-free lump sum at retirement of up to €200,000. However, if you were to pass away what you leave behind as a legacy financially, including your pension, will more than likely be subject to tax.
Your Total Retirement Fund
Think of your total retirement fund as a pot. If you leave your pot to your child it will potentially be subject to inheritance tax or income tax. By using a small proportion of the value of your pot on an annual basis you can set up and pay into a life insurance policy, which will cover the tax bill that will inevitably be due. In this case, 100% of your child’s inheritance from your retirement fund can be protected.
You may or may not be familiar with what is known as a Section 72 life insurance policy which is used to help offset an inheritance tax liability. It is a special insurance policy taken out specifically to help pay taxes arising from inheritance. If setup correctly, the money paid out, when it is used to pay these taxes, will not be subject to tax.
You may leave your Approved Retirement Fund to your husband or wife to make use of when you pass away. It won’t be subject to inheritance tax but any money they take out of it will be liable to income tax.
• If they decide to cash in the entire fund it will be subject to PAYE at marginal rate
(plus PRSI and USC).
• If they don’t take any money out, the fund will still be subject to tax. From the year they turn age 61 ‘Imputed Distribution Rules’ will apply which means income tax is payable on an annual minimum withdrawal amount drawn down from the fund.
And when your spouse passes away the retirement fund may then be left to your children. Alternatively, you could consider leaving your retirement fund to your children.