Pensions are a crucial aspect of financial planning for retirement.
They provide a means to save and invest money during your working years, ensuring you have a steady income when you retire.
While most people are familiar with State Pension age (currently 66), fewer understand the significance of turning 75.
This age represents a significant juncture in pension legislation that affects several aspects of your retirement planning, including how your pension is managed and the tax implications associated with it.
Pension changes at the age of 75
Turning 75 marks a point where several important pension changes occur.
Perhaps the most notable change is the cessation of tax relief on pension contributions, however, the treatment of your pension upon death changes at 75 and the opportunity to take a tax-free lump sum is also affected.
1. Tax relief on contributions
Before turning 75, you can receive tax relief at your marginal rate on pension contributions up to £60,000 per year or 100% of your earnings, whichever is lower.
However, while you can still continue to make contributions to your pension after you turn 75, you will no longer benefit from tax relief on personal contributions.
2. Impact on death benefits
If you die before turning 75, any pension death benefits you leave to your beneficiaries are typically free from income tax.
However, if you die after turning 75, your beneficiaries will have to pay income tax on these benefits at their marginal rate. This change can significantly affect the amount of money your loved ones receive from your pension.
3. Tax-free cash
One of the most attractive features of pensions is the ability to take a portion of your pension pot as a tax-free lump sum, usually up to 25%.
If you haven’t taken your tax-free cash, known as a Pension Commencement Lump Sum (PCLS), by the time you turn 75, you can still do so, but the rules can be more complex and potentially less advantageous.
Some pension schemes may not allow you to take tax-free cash after 75, and any unused tax-free cash may be subject to income tax if you die after this age.
Strategic considerations
Given these changes, it’s essential to plan strategically as you approach 75 and there are some key areas to consider.
- Accelerate pension contributions: If you’re still making pension contributions in your early 70s you may consider accelerating these to maximise the tax relief before you reach 75. This is particularly relevant if you are still earning or have assets outside your pension to transfer in.
- Consider your beneficiaries: If you want to maximise the benefits for your beneficiaries, it might be worth taking your tax-free cash before you turn 75. This can help reduce the tax burden on your loved ones.
- Review your pension scheme: Ensure you understand the specific rules of your pension scheme regarding tax-free cash and death benefits. Some older schemes may not offer the same flexibility as newer ones, so it might be worth considering a transfer to a more modern scheme.
Plan to maximise tax-efficiency
By understanding these changes and planning accordingly, you can ensure that you make the most of your pension and provide for your loved ones in the most tax-efficient way possible.
The rules surrounding pensions and tax can be complex, and the best course of action may not always be immediately obvious.
Consulting with an independent financial adviser can help you navigate these complexities and make informed decisions.
