Retirement assets often focus on income generation, but the tax treatment of those funds after death is equally important. For holders of an Approved Retirement Fund (ARF), the rules on death vary significantly based on the recipient.

Rules for a Spouse or Civil Partner

When it comes to inheritance, spouses or civil partners of ARF holders are in a favourable position, as they can typically assume ownership of the fund and continue to invest the money, with no Capital Acquisitions Tax applying to the transfer, although Income Tax, PRSI, and USC will be payable on future withdrawals.

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 children over 21, the rules change, and instead of Capital Acquisitions Tax, a flat 30% income tax charge is applied to the ARF payment, and they receive the value of the ARF rather than the fund itself, highlighting the importance of considering pension assets in estate planning.

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Understanding this distinction is vital when parents consider how their pension assets fit into their wider estate and inheritance plans.

Tax for Other Beneficiaries

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.

Without a qualifying Section 72 policy, the tax bill could be substantial. 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.

Estate Planning Essentials

Approved Retirement Funds should be considered as part of a full estate plan, alongside other assets such as property, savings, investments, and life assurance, and a valid Will is essential to ensure that one’s wishes are respected.