Key pension changes at 75
While the abolition of the Lifetime Allowance (LTA) in April 2024 simplified some aspects of pension planning, turning 75 still marks a significant transition with key rule changes. Understanding these changes is crucial for managing your retirement savings effectively and planning for your beneficiaries. The most important areas to review are pension contributions, death benefits, and tax-free lump sums.
Pension contributions after 75
One of the most immediate changes is the cessation of tax relief on personal pension contributions. Before age 75, you can receive tax relief on contributions up to the annual allowance. However, any personal payments you make into a pension from your 75th birthday onwards will not benefit from this tax relief. For company owners who are also employees, employer contributions may still be tax-deductible for the business, offering a potential loophole for some business structures. For most, however, this change means there is little personal tax advantage to contributing to a pension after this age.
What happens to your pension death benefits?
The tax treatment of your remaining pension pot changes considerably if you die after age 75. This is a critical consideration for your estate planning:
- Death before age 75: Beneficiaries generally receive pension death benefits income tax-free. This applies as long as the payments are made within the available Lump Sum and Death Benefit Allowance (LSDBA), and within two years of notification of death.
- Death after age 75: Any lump sum or income your beneficiaries receive from your pension will be taxed at their marginal rate of income tax. This makes it essential to review who your beneficiaries are and understand their tax position to maximise the inheritance you pass on. For example, leaving a pension to a non-taxpayer or a basic-rate taxpayer could be more efficient than leaving it to a higher-rate taxpayer.
Many modern pension schemes now offer 'beneficiary access drawdown', which allows beneficiaries to take income gradually over time instead of as a single, large lump sum. This can help them manage their tax liability by spreading the withdrawals and associated income tax over several years, potentially keeping them in a lower tax bracket. Ensure your provider offers this option if it is part of your inheritance strategy.
How does tax-free cash change at 75?
You can still access tax-free cash from your pension after turning 75, but the rules are more complex. The total amount of tax-free cash you can take throughout your life is limited by the Lump Sum Allowance (LSA), which is generally £268,275 for most people.
If you haven't taken your full tax-free cash entitlement before age 75, you can still access it afterwards. However, it's important to know that:
- If you die after age 75 with unused tax-free cash, the tax-free element is lost, and your beneficiaries will pay income tax on the entire amount they inherit.
- Your pension provider's rules may limit your options. Some older schemes may have outdated rules and not offer full flexibility.
Age 75 pension comparison table
| Feature | Before Age 75 | After Age 75 |
|---|---|---|
| Personal Contributions | Eligible for tax relief up to the annual allowance. | No tax relief on personal contributions. |
| Death Benefits (Income) | Inherited tax-free by beneficiaries within the LSDBA (if died before 75). | Inherited income is taxed at the beneficiary's marginal rate. |
| Death Benefits (Lump Sum) | Tax-free for beneficiaries within the LSDBA (if died before 75). | Lump sums are taxed at the beneficiary's marginal rate. |
| Unused Tax-Free Cash | 25% of each withdrawal is typically tax-free. | Unused tax-free cash from the Lump Sum Allowance is forfeited upon death. |
| Required Benefit Test | No test at age 75 since LTA abolished. | No longer an LTA test on drawdown or uncrystallised funds. |
| Flexibility | Higher potential for flexible investment options and transfers. | Investment options may be restricted in some older schemes. |
What should you do now?
Navigating your pension after age 75 requires careful consideration. Here are some steps you can take:
- Review Your Pension Scheme: Contact your pension provider to understand the specific rules of your plan. Ensure it offers modern flexibility, such as beneficiary access drawdown. If it doesn't, consider transferring your pension to a more flexible provider before your 75th birthday.
- Consider Taking Your Tax-Free Cash: If you still have tax-free cash available under your Lump Sum Allowance, it may be prudent to take it before you die. While this moves the money from the tax-protected pension wrapper into your estate, potentially incurring Inheritance Tax, it avoids the certainty of it being taxed as income for your beneficiaries after age 75. This is a complex area and requires professional financial advice.
- Update Your Nominated Beneficiaries: Review your beneficiary nominations, especially if you have an income drawdown plan. Consider appointing beneficiaries who are in a lower tax bracket to minimise income tax on inherited pension benefits.
- Seek Financial Advice: Due to the complexity and potential tax implications, it is highly recommended to speak with a regulated financial adviser. They can help you assess your options and create a strategy that aligns with your specific financial circumstances and inheritance wishes.
Conclusion
While the abolition of the Lifetime Allowance removed a previous tax hurdle at age 75, this milestone still brings critical changes to your pension. The key shifts include the end of personal tax relief on contributions and a change in the tax treatment of death benefits, which become taxable for beneficiaries. Managing your tax-free cash allowance and reviewing your scheme's flexibility are also essential considerations. By proactively reviewing your pension options and seeking expert advice, you can ensure your pension continues to work effectively for you and your beneficiaries in the long run.
This article is for informational purposes only and does not constitute financial advice. For a complete review of your specific situation, it is recommended to speak with an independent financial adviser.
