We’re often asked why age 75 is such a pivotal age for pension holders (mostly personal pension/defined contribution) in the UK and we must confess, we’re not 100% clear why 75 is used.
Regardless, there are a number of key points that you need to be aware of and plan around.
Your pension at age 75
Don’t assume, particularly if you hold an older personal pension or an older defined contribution company scheme, you will have all the modern flexibilities available.
Some pensions schemes may not allow a pension transfer after the age of 75. Other schemes may insist on you purchasing an annuity if you take your tax-free cash entitlement.
Care needs to be exercised if you are transferring from an older less flexible scheme to a modern scheme with more flexible death benefits as this could attract an Inheritance Tax charge. Another reason to review your arrangements before any change in your health.
2. Pension Lifetime Allowance
For larger pension funds and/or those of you who have multiple funds, including some final salary/defined benefit pensions already in payment, reaching age 75 is one of the final checks to determine if you have exceeded the pension lifetime allowance.
If you have more than one pension source, you may need to control in which order these pensions are tested for lifetime allowance purposes.
This can be imperative if there is a good reason for the tax charge to be deducted from a particular scheme e.g. Any proposed tax charge within your defined benefit scheme may look poor value and may lead to this scheme being assessed first. If you have enhanced tax-free cash or guaranteed annuity rates available, it may be beneficial to ensure any tax charge is minimised on these plans by possibly having them tested first.
3. Death Benefit nominations
Reaching age 75 changes the way pension death benefits (defined contribution) are taxed for the recipient. Death before age 75 generally means any benefits are free from Income Tax for the recipient. Death after the age of 75 means payments attract Income Tax.
For some of you, this may be a time to reconsider who your nominated pension beneficiaries are, whether any Trust nomination is still appropriate if beneficiaries are now older and whether the tax charges outweigh the extra control.
4. Tax-Free cash
Again, please do not assume your current scheme automatically gives you the right to delay taking tax-free cash beyond age 75. This is not the case with some schemes.
5. Tax relief on contributions
Tax relief on personal pension contributions ends at age 75, so this may be a timely check, particularly for business owners, to consider one final addition.
6. Pension investment strategy
If we assume the final pension lifetime allowance test has taken place at age 75, we know that any future investment growth thereafter will not be subject to a lifetime allowance test. Furthermore, if there is a strong possibility that a good portion of the pension may be inherited by your spouse or future generations, this ought to trigger a review of the underlying investment mix in the pension.
If you have a question relating to your pension, please get in touch by sending us a message or give us a call on 01825 73 33 66.