Historically, reaching 75 had been a critical age for pensions. Previously contributions had to cease, and pension benefits had to be taken by age 75. Modern pensions now allow contributions post 75 (but no Income tax relief can be claimed) and pensions do not have to be drawn by age 75. Note that some older pensions may still insist on this or may not allow modern flexibilities e.g. just taking tax-free cash.
Pension benefits on death
If a personal pension (SIPP) account dies before reaching 75 then the benefits pass to their nominated beneficiaries free of Inheritance Tax and usually free of Income Tax. Death after age 75 still sees benefits pass free of Inheritance Tax but, beneficiaries will need to add any withdrawal to their other taxable income in the Tax Year of withdrawal.
Given this ability to transfer pensions free of Inheritance Tax, in most cases the default advice position is to leave pensions as the last asset to spend and lifestyles should be financed using other assets e.g. cash, investments, State pensions etc. This might ultimately resort in the pension barely being used at all, other than for an inter-generational wealth transfer strategy.
It may also be prudent to check your nominated beneficiaries running up to age 75 with the change in Income Tax position. Potentially, a change from a higher rate Income Tax paying Adult child to a non-taxpaying Grandchild could be a more tax efficient option (alongside a review of your existing Will to reflect any change.)
Pension Lifetime Allowance
Age 75 also brings a final test for the much-loathed Pension Lifetime Allowance, so a strategy to determine whether the 25% Tax charge on any excess over the Lifetime Allowance at age 75 is preferable over making pension withdrawals pre age 75 to reduce the Lifetime Allowance tax charge at age 75.
You won’t be surprised that we say, “analysis and advice are key!”
Please get in touch if you have any concerns or questions raised by this article.