Understanding uncrystallised funds and the age 75 milestone
Uncrystallised funds refer to pension savings that have not yet been accessed or designated for retirement income. These funds grow within a tax-efficient pension wrapper. Reaching age 75 is a key milestone as it impacts tax-free cash, death benefits taxation, and available options.
Historically, age 75 triggered a test against the Lifetime Allowance (LTA). With the LTA abolished from April 2024, this test no longer occurs. New Lump Sum Allowance (LSA) and Lump Sum and Death Benefit Allowance (LSDBA) are now used for benefit testing. You are not obliged to take benefits at 75 and can leave funds invested.
Options for accessing your uncrystallised funds at 75+
Several options exist for accessing uncrystallised funds at or after age 75, depending on your financial situation, tax position, and preference for flexibility or guaranteed income.
Pension commencement lump sum (PCLS)
A PCLS (tax-free cash) can be taken after age 75 if your provider allows. When a portion of your pension is crystallised into drawdown, a PCLS can be taken, tested against your available LSA (standard £268,275). Provider rules are crucial, as not all permit post-75 tax-free cash.
Uncrystallised funds pension lump sum (UFPLS)
An UFPLS is a lump sum taken directly from uncrystallised funds. Typically, 25% is tax-free and 75% is taxed as income. The tax-free portion is tested against LSA and LSDBA, and may be reduced if allowances are depleted. UFPLS is available post-75 if other criteria are met.
Flexi-access drawdown
Flexi-access drawdown moves some or all uncrystallised funds into a pot for flexible income. You can take a 25% tax-free lump sum and move the rest, or move the entire fund, into drawdown. Drawdown income is taxed at your marginal rate. Funds remain invested, offering growth potential but also market risk.
Buying an annuity
An annuity offers a guaranteed income by using uncrystallised funds to purchase a product from an insurer. Income is taxed at your marginal rate. Annuities provide fixed income for life or a set period.
Comparison of options for uncrystallised funds at age 75+
| Feature | PCLS with Drawdown | Uncrystallised Funds Pension Lump Sum (UFPLS) | Annuity Purchase | Beneficiary Drawdown (Death Benefits) |
|---|---|---|---|---|
| Access | Flexible withdrawals after initial PCLS | Flexible lump sums on demand | Fixed, regular income | Income or lump sums for beneficiary |
| Tax-Free Element | Up to 25% of crystallised amount (tested against LSA/LSDBA) | Up to 25% of each withdrawal (tested against LSA/LSDBA) | Usually none at point of withdrawal (PCLS taken beforehand) | None on death after 75 (beneficiary is taxed) |
| Taxation of Income | Taxed at marginal rate | 75% of each withdrawal taxed at marginal rate | Taxed at marginal rate | Taxed at beneficiary's marginal rate |
| Control | High degree of control over investments and withdrawals | High degree of control over withdrawals | No control once purchased | Beneficiary controls withdrawals |
| Investment Risk | Fund remains invested and exposed to market risk | Fund remains invested and exposed to market risk | No investment risk after purchase | Remaining fund remains invested for beneficiary |
| Suitability | Prefers flexibility and actively manages investments | Needs flexible lump sums and is comfortable with tax implications | Prioritises security and guaranteed income | Effective for passing wealth to heirs |
The crucial role of death benefits after age 75
Death benefits treatment of uncrystallised funds changes significantly after age 75. Before 75, beneficiaries often receive funds tax-free (subject to LSDBA). Post-75, any funds passed to a nominated beneficiary, whether as a lump sum or income, are added to their income and taxed.
Post-75 death benefit taxation
If death occurs after age 75 with uncrystallised funds, beneficiaries receive funds taxed at their marginal income tax rate.
Lump sum vs. beneficiary's drawdown
A beneficiary can take a lump sum, from which the provider deducts tax via PAYE, potentially requiring a reclaim. Alternatively, funds can go into a beneficiary's drawdown account for flexible, taxed withdrawals over time. This can be more tax-efficient than a large lump sum and keeps funds outside the beneficiary's estate for Inheritance Tax.
Strategic considerations for uncrystallised funds at 75+
Key strategic points for uncrystallised funds at 75+ include:
- Contribution cessation: Tax relief on pension contributions stops after age 75, and some providers may not accept new contributions.
- IHT planning: Leaving funds in a pension can be effective for Inheritance Tax (IHT), as unused pensions are currently outside your estate.
- Scheme restrictions: Provider rules on post-75 options vary, and some may require a transfer to a more flexible scheme.
- Professional advice: Given the complexity and potential for rule changes, professional financial advice is highly recommended.
Conclusion: Navigating your uncrystallised pension post-75
Reaching age 75 marks a change for uncrystallised funds, primarily due to the LTA abolition and the new focus on LSA and LSDBA for tax-free cash. A significant change is the taxation of death benefits at the beneficiary's marginal rate.
Decisions on accessing funds usually involve UFPLS, drawdown, or an annuity, chosen based on income needs, risk tolerance, and inheritance goals. Professional advice is vital for navigating these complexities and optimising pension savings.
For more information on current pension rules, refer to the government's guidance on lifetime allowance abolition [https://www.gov.uk/government/publications/pensions-schemes-newsletter-159-april-2024].
