The Confusion with Pensions and reaching age 75

If you have a pension, there’s a good chance that before your 75^th birthday, you’ll receive some potentially puzzling paperwork from your pension provider suggesting that you need to act now or some mysterious pension rule will knock your plans off track.

This can seem bamboozling but for many, there is little if any action required.

Common Myths

You must withdraw or lose your tax free cash

One of the main attractions of pensions is the tax free part, normally 25% of the fund. In times gone by, you would need to use it or lose if before your 75^th birthday. However, the current regime lets you hold on to your tax free cash for life; though it’s worth bearing in mind that if you die after age 75, any pension funds passed to your beneficiaries may be taxable.

You must decide how to use your pension funds

Pension schemes normally ask individuals to choose a ‘retirement date’. In the old days, this would be the date when you decide how to withdraw income from your fund e.g. by purchasing a guaranteed income for life or creating a drawdown fund, where you continue to invest the money and choose how much income to withdraw. Age 75 is often chosen as this is the latest retirement age allowable.

Confusingly, at your retirement date your pension provider will send you paperwork proclaiming you’ve reaching this milestone and setting out your options for withdrawing income. However, under the current rules you do not actually need to do anything at all!

It’s worth bearing in mind that a small number of older pensions may have protected benefits (e.g. a guaranteed income rate) that come into play at the retirement date. If in doubt, have a word with your Financial Planner.

Other Issues

The Lifetime Allowance Check

Age 75 is normally the last time your pension provider will need to check if you have gone over your pension Lifetime Allowance (LTA). The LTA is how much you are allowed to save into pensions overall before paying a tax charge. Most have a standard allowance, currently £1,073,100 though some will have a higher sum protected under the old regime.

Your pensions are checked against the LTA when you begin to withdraw benefits otherwise, a final check is run at age 75. If you have untouched pension funds, your pension provider will likely write to you to ask for details of any other pensions you hold so they can calculate if you are within your allowance. This will still happen even if the value of your pension is very small. Typically 25% tax will be deducted from any excess above your allowance which your provider will pay direct to HMRC:

e.g. if you have pensions worth £1,173,100 and a standard allowance, hence an LTA excess of £100,000, £25,000 tax will be due.

(Note, if you have a Financial Planner, they can provide the necessary details to your provider on your behalf, to run the calculation).

What to do

Reaching age 75 might simply mean receiving some unfamiliar paperwork from your pension provider; though if you have significant tax free cash to take or are on track to pay a significant LTA tax charge, it’s probably a good idea to engage a Financial Planner. If this is something you would be interested in discussing with Carbon Financial, please contact us.

The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.

Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.