Turning 75 is a huge personal milestone, but it’s an important event in the life of your pension too.

It’s at this age that pension death benefits become taxable, tax relief on contributions ends, and for many, your final test against the Lifetime Allowance (LTA) occurs. 

This test, of which there are 13 different types, is known as a “benefit crystallisation event (BCE)”. Failing the test, by breaching the LTA, will result in an additional tax payment, an “LTA charge” being payable.

You’ll have a lot to think about in the run-up to your 75th birthday, but clever financial planning can take this important pension milestone into account long before the big day.

Here are a few points to consider when planning for age 75 and beyond.

The LTA is the value of pension benefits you can access in your lifetime

In his 2021 Spring Budget, then-chancellor Rishi Sunak elected to freeze the LTA at its current amount until 2026. This limits the value of pension benefits you can take in your lifetime – without a charge being payable – to £1,073,100.

Benefits exceeding this amount are taxed depending on how the excess benefits are taken. 

Currently, tax is payable at 55% on excess funds taken as a lump sum, and 25% on income.

The LTA is important as you approach age 75 because at this point both your crystallised and uncrystallised funds will be tested against it.

Turning age 75 is one of 13 BCEs that trigger a test against the LTA

Broadly speaking, a BCE occurs when you access pension funds. This might be through:

• Buying a guaranteed income for life 
• Taking a specific type of flexible lump sum 
• Allocating pension funds to drawdown.

Turning age 75 is also a BCE. This means that while you might trigger multiple tests during your retirement, for most people, reaching age 75 marks their final BCE.

Careful financial planning – managing pension contributions or making full use of ISA subscriptions, for example – could mitigate the risk of a charge being payable. But avoiding the charge at all costs might not be prudent either. 

Remember that pensions are incredibly tax-efficient, benefiting from:

• Tax-free growth
• Tax relief on contributions
• The “free money” of employer contributions
• A 25% tax-free cash lump sum at retirement
• Being outside of your estate for Inheritance Tax purposes.

Financial planning can help decide on the best option for you.

Could withdrawing from pension schemes in a particular order, for example, help to lessen a potential charge? Maybe the benefits of tax-free growth within a favourable pension wrapper mean the charge is acceptable?

The answers to these questions will depend on the size of your pension pot, how you plan to take the excess funds, and what other savings and investment products you have.

You’ll also want to think carefully about the rules surrounding death benefits pre- and post-age 75.

Death benefits can still be paid after age 75 but they become taxable

Pension wealth is not only outside of your estate for IHT purposes, but it can also be passed on tax-free on death before age 75.

Contact your pension provider to request an Expression of Wish form, which can be used to nominate your beneficiary. 

Note: this can’t be done via your will.

In the event of your death before age 75, unused pension funds can be passed to your chosen beneficiary, tax-free. These rules change from age 75.

Upon your death after 75, unused funds can still be passed on, but your beneficiary will pay Income Tax at the highest rate they pay.

Get in touch

Pension planning isn’t easy, either in the approach to retirement or in the years that follow. With the LTA currently frozen, more and more retirees will find themselves liable for a charge in the next three years, but planning can help. 

Whether you are accessing benefits for the first time or turning 75, how you approach the LTA will be dependent on your circumstances. We can use our decades of experience to help build a plan individual to you. If you have any questions, please get in touch and speak to us today.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

Workplace pensions are regulated by The Pension Regulator.