Pension rules give choice and benefits
Pension regulations have changed a lot in recent years, with investors of all ages having a lot of choice about what they can do with their pension savings.
As a result, many people have consolidated all their pension savings into one modern pension plan. That can make it much easier to keep an eye on values and manage investments. And it means you can access your money in a variety of flexible ways.
If you haven’t given much thought to the benefits of consolidating your pensions, now might be a good time to do so. Otherwise, you could lose many of these benefits if you don’t take any action before you turn 75. Of course, consolidating different pensions may not be right for everyone. You need to consider all the facts and decide if it’s right for you. This is where a financial adviser can help. They’ll take account of your personal circumstances, and look at the details of all your different pension plans.
Annuities, lump sums and age 75
The impact on your pension of reaching age 75 will depend on the type of pension plan you have and what you’ve done with it so far.
For example, you may have a defined contribution pension plan that you haven’t touched yet. On closer scrutiny of the plan, you may find that you have to set up a guaranteed income for life (an annuity) by the age of 75.
Or perhaps you’re in an older-style income drawdown (also known as flexible income) scheme, set up before pension freedom reforms in April 2015. It may include a rule that you must set up an annuity with it by that magical age too.
And, if you haven’t already taken your 25% tax-free cash, some older pension plans may prevent you from doing so after the age of 75.
What this all means is that if you’re nearing your 75th birthday, you should check your pension arrangements and take appropriate action to make sure you don’t lose out on benefits like your 25% tax-free cash and having the flexibility to take your money as you want.
Passing things on – your 75th birthday makes a difference
The tax treatment of any pension savings you pass on when you die also changes at age 75.
If you die before the age of 75, your pension savings can be paid to the beneficiary of your choice. It can be paid either as a tax-free lump sum or to provide a tax-free income (as income drawdown or an annuity).
If you die after the age of 75, your beneficiary can take the pension as a flexible income or a lump sum payment. But they’ll be taxed at their marginal rate of income tax.
This means it may be worth considering taking any tax-free cash from your pension savings before you reach 75. Doing so could reduce the future potential income tax your beneficiaries have to pay. However, it may have inheritance tax implications depending on your circumstances and what you do with the cash. The right course of action will depend on your personal situation and what’s most important to you.
Pensions are an important element of wealth management, so you may want to speak to a financial adviser about how you can use your pension savings to benefit your loved ones. There may be a cost for advice.
Testing the Lifetime Allowance (LTA)
Another impact of reaching 75 is that any untouched pension savings and drawdown funds above the original amount you’ve invested will be tested against your LTA.
The LTA for the tax year 2021/22 is £1,073,100. This is the total amount you can have in pension benefits without having to pay tax. It’s a complicated area, so if you think you might be nearing the LTA limit, it’s a good idea to get financial advice.
Get in touch
Hopefully you now have a little more understanding about the significance of age 75 for your pension savings. If you’re already one of our clients and have any questions about what you’ve read here, get in touch with your financial planner. They’ll be happy to help.
Alternatively you can book a free initial call with one of our financial planners here.
This blog should not be regarded as financial advice. Laws and tax rules may change in the future and your tax treatment is based on your individual circumstances. The information here is based on our understanding in September 2021. Investments can go down as well as up in value and you may get back less than you paid in.