When you reach 75, key aspects of your pension arrangements can change, particularly concerning tax implications and how your funds can be passed on after your death. While you're not forced to take your pension at this age, it marks an important review point due to shifts in tax rules and potential changes in your financial priorities.
The most significant impact is on the tax treatment of your pension funds if they are inherited by beneficiaries. Before age 75, pension death benefits can generally be paid out tax-free to your nominated beneficiaries. However, once you reach 75, this changes: any remaining pension funds passed on to beneficiaries will typically be subject to their marginal rate of income tax. This means the tax advantage of delaying access to your pension with the primary aim of preserving tax-free death benefits largely disappears.
Key Changes to Your Pension at Age 75
Reaching 75 doesn't necessarily dictate how you access your pension, but it does alter some fundamental considerations.
Taxation of Death Benefits
One of the most notable changes at age 75 is the shift in how pension death benefits are taxed.
- Before Age 75: If you die, any unused pension funds can usually be passed on to your beneficiaries (e.g., your spouse, children, or nominated individuals) completely free of income tax. This applies whether the funds are in drawdown or still untouched in the pension pot.
- At or After Age 75: Upon your death, any remaining pension funds will be added to your beneficiaries' income and taxed at their marginal rate of income tax. This applies whether they take the money as a lump sum or as a regular income from a beneficiary drawdown pension.
This change significantly reduces the tax benefit of simply leaving funds untouched in your pension after age 75 purely for estate planning purposes.
Accessing Your Funds: Annuities and Drawdown
Your options for accessing your pension funds remain open at 75, but the considerations might shift.
- Annuities: You can still use your pension pot to purchase an annuity. An annuity provides a guaranteed income for life, or for a set period, in exchange for a portion or all of your pension fund. This can be particularly appealing if you're looking for predictable, secure income in later life.
- Pension Drawdown: If you are already in drawdown, you can continue to take flexible income withdrawals from your pension fund. If you haven't accessed your pension by 75, you can still opt for drawdown, allowing your money to remain invested while you take an income.
Shifting Priorities and Planning
For some individuals, reaching 75 brings about a change in financial priorities. You might find that your income requirements become more predictable, and the desire for maximum flexibility with your pension funds may decrease. This could make options like securing a guaranteed income through an annuity more appealing, as the tax advantages of maintaining high levels of flexibility in drawdown for death benefit planning diminish.
The Lifetime Allowance (LTA) and Age 75
It's important to note a significant recent change: the pension Lifetime Allowance (LTA) was abolished from 6 April 2024. Previously, reaching age 75 was a key testing point for the LTA, where the value of your untouched pension funds was assessed against the allowance, potentially leading to a tax charge if exceeded. With the LTA's abolition, this specific concern is removed. However, the death benefit tax changes at 75 remain relevant.
Summary of Key Differences
The table below highlights the primary differences in pension treatment before and after age 75, particularly concerning death benefits.
| Feature | Before Age 75 | At or After Age 75 |
|---|---|---|
| Death Benefit Tax | Generally tax-free for beneficiaries. | Taxable at beneficiary's marginal income tax rate. |
| Annuity Purchase | Still an option for guaranteed income. | Remains an option for guaranteed income. |
| Flexible Drawdown | Continues to be available. | Continues to be available. |
| Lifetime Allowance | Was a testing point (now abolished). | Was a testing point (now abolished). |
| Planning Focus | Often includes tax-free death benefits. | Shifts focus away from tax-free death benefits. |
Practical Insights and Considerations
- Review Your Nominated Beneficiaries: Ensure your pension provider has up-to-date details of your nominated beneficiaries. This ensures your funds go to the right people.
- Consult a Financial Adviser: Due to the complex nature of pension taxation and your personal circumstances, seeking professional financial advice is highly recommended. An adviser can help you understand all your options and plan effectively for your later years. You can find independent financial advice through services like Pension Wise.
- Consider Your Income Needs: Reaching 75 is a good time to re-evaluate your income requirements. Do you need a guaranteed income, or do you prefer the flexibility of drawdown, even with the tax changes?
- Estate Planning: Integrate your pension planning with your overall estate planning to ensure your assets are passed on efficiently and according to your wishes.
While reaching 75 brings changes to pension taxation, particularly for death benefits, it also offers an opportunity to reassess your financial strategy for later life.
