The Historical Context: The Pre-Abolition LTA
Before 6 April 2024, the Lifetime Allowance (LTA) was a ceiling on the amount you could accumulate in your pension pots over your lifetime without incurring a tax charge. This limit fluctuated over the years but was set at £1,073,100 from 2020. Several key moments triggered a "benefit crystallisation event" (BCE) which tested the value of your pension funds against the LTA. One of the most significant BCEs occurred on your 75th birthday.
At age 75, any remaining uncrystallised funds (money not yet accessed) and any growth in drawdown funds since they were first moved into drawdown were tested against the available LTA. If the total value exceeded the remaining LTA, a tax charge was applied. The 25% charge was levied on the excess, and the resulting fund balance could be used for income. This historical rule meant that proactive planning around age 75 was crucial for individuals with larger pension pots to mitigate potential tax liabilities.
The End of the Age 75 Test
The abolition of the LTA in April 2024 effectively ended the automatic benefit crystallisation event at age 75. For those with significant pension savings, this is a major simplification. You are no longer required to conduct a valuation of your pension pots or face an LTA charge solely because you turned 75. Instead, your pension funds can remain invested and continue to grow without this specific tax test hanging over you.
This is particularly good news for those with funds in drawdown, as any investment growth after age 75 is no longer subjected to the previous LTA valuation. The pension pot can continue to provide a sustainable income, and tax is only applied when funds are withdrawn as income, as is the case for most pension income.
The Introduction of New Allowances
The LTA has been replaced by two new allowances that specifically cap the amount of tax-free lump sums you can take, not the total value of your pension savings. These are the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA).
- Lump Sum Allowance (LSA): This limits the total amount of tax-free cash you can take across all your pensions throughout your lifetime. For most people, the standard LSA is capped at £268,275 (25% of the old LTA of £1,073,100). If you have a protected LTA, your LSA might be higher. Tax-free cash can still be taken after age 75, but it will be limited by your remaining LSA.
- Lump Sum and Death Benefit Allowance (LSDBA): This new allowance limits the total tax-free lump sums that can be paid both during your lifetime and on your death. Its standard value is £1,073,100, though this can also be higher if you hold certain protections. Any tax-free lump sums taken in your lifetime reduce your available LSDBA.
Comparing the Old and New Rules at Age 75
| Feature | Old LTA Rules (Pre-April 2024) | New Rules (Post-April 2024) |
|---|---|---|
| Automatic Test at 75 | Yes, a mandatory benefit crystallisation event (BCE) occurred. | No, the age 75 test has been completely removed. |
| Tax Charge at 75 | Funds exceeding remaining LTA incurred a 25% tax charge at age 75 (paid by provider). | No tax charge on excess funds at age 75. Funds continue to grow unchecked by this limit. |
| Drawdown Growth | Growth in drawdown funds was re-tested against the LTA at age 75. | No re-testing of drawdown growth at age 75. Growth is not measured against a lifetime cap. |
| Tax-Free Cash | Entitlement was calculated based on remaining LTA at the point of taking benefits. | Governed by the new Lump Sum Allowance (LSA), limiting total tax-free cash over a lifetime. |
| Death Benefits (after 75) | Beneficiaries paid marginal income tax on withdrawals; no LTA charge. | Beneficiaries still pay marginal income tax on withdrawals; no LTA test. |
| Purpose | Capped total pension pot size and taxed excess. | Focuses on capping tax-free lump sums, with no limit on total pot size. |
What Still Matters at Age 75
While the LTA test is a thing of the past, age 75 remains a significant milestone for pension planning, particularly concerning death benefits.
Death Benefits and Taxation: The most critical consideration is the change in taxation on death benefits depending on whether you pass away before or after age 75. For those who die after age 75, any inherited pension funds taken as a lump sum or income by beneficiaries will be subject to their marginal rate of income tax. In contrast, if death occurs before 75, beneficiaries can take benefits tax-free up to the available LSDBA, provided they are paid within a two-year window.
Tax-Free Cash: For those who still have an unused tax-free cash entitlement (PCLS), careful consideration is needed. If you die after age 75 without taking your remaining LSA, this entitlement is typically lost. Any funds your beneficiaries receive will be taxed as income instead. As a result, it may be prudent to review your situation around this age if you still have untaken tax-free cash.
Drawdown Flexibility: Fortunately, the abolition of the LTA test means greater flexibility for those in drawdown. Funds can remain invested and continue to provide income, giving you more control over your retirement finances without the constraint of the 75th birthday valuation. The options available to you, however, are still dependent on your specific pension scheme's rules and whether it offers nominee flexi-access drawdown.
Proactive Planning in the New Era
The removal of the LTA does not mean the end of pension planning. On the contrary, it places a renewed emphasis on strategic decisions, especially as you approach age 75. Individuals with larger pension funds must now consider the implications of the new LSA and LSDBA, as well as the tax treatment of death benefits. Decisions about when and how to take pension benefits, and ensuring your pension scheme offers flexible drawdown for beneficiaries, are more important than ever.
For authoritative government guidance on pension changes, consult the official information on GOV.UK Pensions.
Conclusion
The answer to "what happens at 75 with lifetime allowance" is that the LTA no longer exists and the age 75 test has been removed. This simplifies life for many pensioners by eliminating a complex and potentially costly tax charge. However, it introduces new considerations related to the Lump Sum Allowance and the Lump Sum and Death Benefit Allowance, particularly regarding tax-free cash and the taxation of death benefits after age 75. Consulting with a financial adviser can help you navigate these updated rules and ensure your retirement plans are optimized for your circumstances.
