Turning 75 is often considered to be a milestone.
Some people think of it as the last “big” birthday before becoming a centenarian.
But it can also be an administrative milestone when it comes to your finances – and for your pension, specifically.
For pensions, the significance of this date decreased in many ways a few years ago when legislative reforms meant you no longer had to buy an annuity on your 75th birthday if you hadn’t already started to take your pension benefits.
But there are still some things you should be aware of as you approach the big day.
- Pension rule changes after age 75
- Do I have to buy an annuity when I turn 75?
- Will I have to pay a lifetime allowance penalty?
- Making additional contributions
- What are pension providers’ rules?
One of the biggest changes to happen to your pension when you turn 75 is the impact on the death benefits you leave your loved ones.
As a general rule, if you die before you turn 75, any pension death benefits you leave are free from income tax. However, once you turn 75, the recipients of these death benefits will pay income tax at their marginal rate.
(And any lump sum paid to a trust on death after your 75th birthday will have 45% tax deducted, meaning only 55% of the lump sum will be available for investment in the trust.)
Initially, it might seem appealing to withdraw a cash lump-sum earlier so it’s no longer part of your pension, and simply part of your estate. But this might not be the best option as it might lead to other unintended tax implications. This is because if you withdraw the money from your pension and invest it elsewhere – or spend it and boost your estate in other material ways – and you’re over the inheritance-tax threshold, it’ll be hit by a 40% tax on your death.
On top of all this, although you are legally allowed to withdraw a lump of tax-free cash from your pension after you turn 75, not all schemes will necessarily allow you to do this. You don’t want to wait until it’s too late to find that out.
The option that results in the lowest tax liability for you (or your loved ones) might not be immediately obvious, so it’s always wise to take financial advice before you make any decisions.
Under the law, no you don’t. But, although the legislation around pensions has been modernised over the past decade, that doesn’t mean that all pension providers have updated their products.
So if your pension hasn’t incorporated the latest flexibilities into its rules, you might find yourself having to buy an annuity (ie, a monthly income for life) when you hit 75.
It’s important to take steps before then to understand how your own pension works, as it might be the case that moving it somewhere else before your 75th birthday could increase your options. This is where it’s important to understand all your options and take advice if you are unsure.
Read more: How do pensions work?
The LTA restricts the total amount you can build up across all your pension savings without incurring a tax charge. For 2022-23, the LTA is £1.073m, which has been fixed until at least 2026.
You are allowed to pay in more than that but if you breach the limit, you’ll face what could be a hefty tax charge when you come to withdraw your money. You’ll pay tax of 25% on any excess funds taken as income and 55% on any lump sums.
During the life of your pension, there are “benefit crystallisation events” (BCEs). These involve measuring the value of the benefits in your pension scheme that have been “crystallised” (when you start taking your pension benefits) against your lifetime allowance.
Some of these BCEs are triggered when you turn 75, depending on how you are using your pension.
If you do have to pay an LTA charge, and you have more than one pension, it’s important to take advice over which fund you should withdraw the tax from, as different pension schemes can come with different benefits.
For example, if you have two pensions but only one of them has an annuity rate that is guaranteed to rise every year, it might be sensible to use funds from the other pension to pay any LTA bill – leaving the more generous pension intact.
You get tax relief on contributions you make into your pension – but this relief applies only until you turn 75. If you want to make any top-up payments it’s sensible to consider making them before your 75th birthday, although bear in mind that if you are not earning your annual contributions are limited to £3,600 gross.
Although legislation in recent years means that pension obligations have been relaxed, that doesn’t mean that the rules surrounding your own pension have been updated.
If the terms that were in place when you started your pension haven’t been updated, it might mean you’re still bound by the rules you signed up for many years ago (such as with tax-free lumps sums as already mentioned).
You should check the small print to make sure that your pension provider lets you enjoy the full flexibility of the current legislative framework. If you’re unsure, consider taking independent financial advice.
An independent financial adviser can help you identify anything you need to take care of as you approach your 75th birthday, as well as help you plan your retirement income.
At Alan Boswell Financial Planners we take the time to talk you through any decisions that need to be made and outline your options based on your personal circumstances. For further information on pension advice and your retirement, contact our independent financial advisers on 01603 967967.
Please note, the value of an investment and any income from it can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.
The value of tax benefits depends on your individual circumstances and the laws concerning these can change.