Insured Risk Benefits
Occupational pension schemes may provide explicit risk benefits. Pensions or lump sums may be payable on the death of the pension scheme member in service or in retirement. In the case of death in service, the benefit is likely to have a significant risk element, equivalent to a life policy. In contrast, in the case of death in retirement, the benefit will usually derive from the individual’s fund. The benefits may accrue for the estate or for the spouse and children of the deceased scheme member.
Pensions and lump sums arising on death in service differ from those in respect of death in retirement. Pensions which arise on death in retirement are fully funded at the outset by the relevant annuity. On his retirement, the pension scheme may purchase an annuity for the benefit of the pensioner only. More commonly, the annuity provides a primary pension for the scheme member, with a further pension at the level of a fraction of the primary pension for the spouse’s life and /or dependent children.
Death in service benefits may comprise a lump sum and/ or benefits to the spouse or dependents. The terms of the scheme will determine whether the particular benefit or benefits that apply. There may be discretion as to whether and to what extent a lump sum is paid at all. The entire sums may be applied towards a pension.
Pensions benefits payable under occupational pension schemes in respect of death in service are commonly linked to salary. In this case, the relevant salary is a multiple of salary at death, rather than the projected salary at retirement. It cannot exceed the amount that would have been payable to the deceased had he or she retired on ill-health grounds at the date of death.
Benefits may be paid up to the level of the maximum benefits that would have been payable at retirement age. The total benefits available to the spouse and dependents cannot exceed two-thirds of final remuneration. Where the members’ service was for less than 10 years, the maximum amount is reduced.
Death in Service Lump Sum
Revenue rules permit death in service benefits to be paid before normal retirement age. Benefits of the greater of €6,350 or up to four times final remuneration may be paid. In addition, a refund may be made of the employee’s contributions to the scheme together with reasonable interest. If the employee has made additional voluntary contributions (as AVCs or otherwise), their full value may be available.
The Revenue rules allow a lump sum to be paid to the personal representative, spouse or dependents in the event of the member’s death. The decision as to whom the payment should be made may be pre-determined, the subject of the member’s lifetime nomination or at the discretion of the trustees, employer or administrator.
Death in Service Survivor Pensions
After the death of the member / principal pension beneficiary, a pension may be provided for his spouse and / or dependents. The total value of these benefits cannot exceed the value of benefits, which the deceased could have otherwise received. The rules may provide that a particular percentage of the deceased’s pension will be payable to the spouse. The amount may increase in accordance with inflation from the date of retirement.
A pension payable on death in service under a defined benefit schemes may be calculated in a broadly similar manner to a pension on retirement. It is capped in a manner analogous to that applicable to pensions payable on retirement. Notional service to retirement at the prevailing salary is assumed, and the survivor’s pension is calculated on the basis of notional service to the retirement date. The survivor’s pension is capped at a percentage of the member’s notional pension on retirement.
In the case of defined contribution schemes, the maximum survivor’s pension will be based on a percentage of salary rather than on the notional retirement pension. The Revenue Commissioner’s contribution limits and funding limits are applicable. The total pensions payable to spouse and children cannot exceed the maximum which would have been payable to the member.
The pension benefits may be payable to the spouse only or to the spouse and dependents. The benefits may be extended to civil partners. Dependents must be financially dependent on the deceased and payments may continue during such dependency only
There may be provision for pensions for children either immediately on the death of the member, or on the death of the member’s spouse. The scheme may provide for a children’s pension until they reach the age of 18 years, or a later age if they are in full-time education. It may be payable until the last child reaches the relevant age.
Children under 18 years old are regarded as dependent, as are those over 18 years old, who are in full-time education or vocational training. Permanently incapacitated children or others who are financially dependent may receive a pension indefinitely.
Most commonly, pensions for the benefit of children arise only on the death of the surviving spouse. Some schemes may be designed so that a survivor’s pension takes effect immediately and is not deferred until the death of the surviving spouse. The benefit may be payable to individual children. The trustees may have discretion as to the apportionment. The maximum is generally 50% of the primary pension.
Lifetime Nomination of Pension Beneficiary
There may be provision for a member’s nomination of survivors’ benefits. The beneficiary of the benefits on death may be nominated by the member in his lifetime. This may be legally binding. Commonly, there is a letter of wishes which is not legally binding on the trustees, but which will be usually adhered to, allowing flexibility to deal with unforeseen circumstances.
In some cases, the scheme may provide an element of discretion for the trustees as to the application of the benefit.
There are some Revenue restrictions. The principal restriction is that the maximum lump sum is capped at four times final remuneration (taking account of other lump sums benefits) and the refund of contributions with interest.
The trustees may have discretion in relation to the payment of benefits to spouses and children. They may be entitled to pay them to one or more of a wider category of persons. The considerations applicable to the exercise of the discretion, are similar to those applicable generally under discretionary trusts.
Where the trustees exercise discretion, the prospective beneficiaries will be entitled to have their interests taken into account. However, they will not usually be entitled to have any particular benefit vested in them, if, having taken their interests into account, the trustees decide to vest it in another. The trustee’s exercise of discretion will not be overturned by a court, provided that it is not arbitrary, unreasonable, capricious, undertaken in bad faith, or patently irrational.
The discretion may be exercisable in favour of persons who appear to be financially dependent on the deceased member, his personal representative and persons entitled to his estate. The precise position and the nature of the discretion and powers of nomination will be determined by the terms of the scheme.
Death in Retirement
Lump sums benefits are less common in the case of death in retirement. A separate life policy or the scheme terms may provide cover for death in retirement in exceptional circumstances.
An annuity may provide for a guaranteed term of 5 to 10 years. The balance of the annuity period may be paid as a pension or as a lump sum.
The payment of a spouse’s or dependent’s benefit may commence on the employee’s death. This period may be deferred if the principal pension beneficiary’s annuity was guaranteed for a period of more than of 5 years (up to a maximum 10 years).
Although the member/ employee may have taken a lump sum benefit which reduced the amount available for an annuity, the spouse’s benefit may be permitted (subject to pension rules) to be based on the pre-commutation amount. The spouse’s benefit may itself last for life. It may terminate on remarriage. A dependents pension terminates on cessation dependency most commonly, when the child reaches 18 years ceases to be in full-time education.
A pensioner may be entitled to reduce surrender part of his own pension on retirement for the purpose of funding a benefit for his spouse and dependents after his death in retirement. The above broad restrictions apply. This may be beneficial when the scheme does not allow provide for a spouse or dependents pension.
Guarantees on pensions may be up to 10 years, (the period must not be less than 5 years). The balance can be paid as a lump sum. No guarantee is permissible in respect of minimum length of a spouse’s and dependent’s pension.
As an alternative to providing a guaranteed annuity for a period, a pension scheme may provide that a lump sum is payable on the member’s death, equal to the difference between benefits already received and his own contributions plus interest. The sums may be payable to spouse’s personal representative or nominated beneficiary.
The death in service benefits under the pensions scheme rules should reflect the underlying policies of insurance. In the event of a mismatch of benefits, the scheme may be obliged to finance them from own funds. Death in retirement benefits are usually funded and reflected in the annuity purchased from the retirement fund.
Risk policies are generally taken out by the trustees in their own name. Where a new trustee is appointed, a vesting declaration may transfer the assets under the Trustees Act. Life policies are assignable under legislation by notice of assignment and acknowledgement.
Insurance legislation confirms that a policy of insurance of this nature for the benefit of unnamed persons who are ascertainable is permissible. This facilitates policies for the benefit of a scheme member’s successors. Revenue requires that the death benefits be for the benefit of an employee or former employee or their spouses and children etc.
Large schemes may choose not to insure risk-benefits, such as those arising on death in service. If they are sufficiently large, they may in effect be able to self-insure and cover the statistical probability of death in service from their own funds. More commonly, even schemes which largely self-invest, are likely to take out life insurance on an individualised, or more commonly on a group basis, in respect of risk benefits.
The insured sum may be a lump sum which may be paid as such or which may be used to purchase an annuity / pension for a surviving spouse and / or child. There may be an element of lump sum and pension.
Some schemes, provide life cover only on a group basis but are technically classified as occupational pension schemes for tax and regulatory purposes.
A Section 785 policy, is a life assurance benefit similar in nature to a personal pension scheme, which provides benefits on death in service (under a certain age) only. It is usually taken out as part of or in conjunction with a personal pensions, / Retirement Annuity Contract. It may stand alone.
A S.785 policy qualifies for tax relief on a similar basis to personal pension policies and PRSAs. It provides for a lump sum on death before retirement age. Tax relief is available on contributions in respect of a Section 785 policy, in the same way as in respect of retirement benefits. A contribution of up to a percentage (usually 5%) of net reckonable earnings, may be used to pay annual premiums on a Section 785 policy.
See the article on Retirement Annuity Contract in relation to the benefits under personal pension policies (RACs) and PRSAs. In addition to the S.785 policies, there may be a death in retirement benefits under the annuity purchased, such as a guaranteed annuity or a secondary pension benefit. An approved Retirement Fund is wholly owned so that it may pass as part of the member’s assets on death.
References and Sources
Irish Pensions Law & Practice Buggy, Finucane & Tighe 2nd Ed (2005)
Pensions; Revenue Law and Practice (ITI) McLoughlin, Dolan et al (2013)
Trustee Handbook the Pensions Authority 5th Ed 2016
Statutory Guidance the Pensions Authority (Various)
Pensions Law Handbook 12 Ed Nabarro Nathanson Bloomsbury
Corporate Insolvency 6e: Employment & Pension Rights (6th Revised edition)
Occupational Pensions (Subscription) Lexis Nexis
Pensions Law and Practice with Precedents (Subscription) Sweet & Maxwell
Sweet & Maxwell’s Law of Pension Schemes (Subscription)
The Guide for Pension Trustees World Economics Ltd
The Guide for Pension Trustees website, you can:
Tolley’s Pensions Law Looseleaf Service (Subscription)
Pensions Act, 1990
Pensions (Amendment) Act, 1996
Pensions (Amendment) Act, 2002
Pensions (Amendment) Act, 2006
Social Welfare and Pensions Act, 2005 (Part 3)
Social Welfare Reform and Pensions Act 2006
Social Welfare and Pensions Act 2007
Social Welfare and Pensions Act 2008
Social Welfare (Miscellaneous Provisions) Act 2008
Social Welfare and Pensions Act 2009
Social Welfare and Pensions (No. 2) Act 2009
Social Welfare (Miscellaneous Provisions) Act 2010
Social Welfare and Pensions Act 2010
Social Welfare and Pensions Act 2011
Social Welfare and Pensions Act 2012
Social Welfare and Pensions (Miscellaneous Provisions) Act 2013
Social Welfare and Pensions Act 2013
Social Welfare and Pensions (No. 2) Act 2013 49/2013
Social Welfare and Pensions Act 2014
Social Welfare and Pensions (No. 2) Act 2014 41/2014
Social Welfare (Miscellaneous Provisions) Act 2015 12/2015
Social Welfare and Pensions Act 2015 (Part 3)