Pensions after 75

When you reach the age of 75 the rules for pensions change. This can have significant tax planning implications for you and the people who inherit your estate or pension.

There are three main considerations here.

First, once you’ve reached the age of 75, you’re no longer eligible for personal tax relief on pension contributions. Quite simply, there’s no personal tax benefit from investing in a pension once you reach that age. So there would be little point for someone who’s 75 or older to invest in a pension.

Even so, and here we come to the second consideration, the owner of a limited company who is aged 75 or older may still gain a tax benefit from paying into a pension. This is because they are their own employer and pension contributions made by an employer are typically eligible for corporation tax relief. That is the case even after the pension holder reaches the age of 75.

So, as an employer, a company owner would generally pay no corporation tax on their pension contributions, resulting in a tax saving for the business. And as they own the business, paying into a pension would end up being a tax saving for the company owner themselves.

No inheritance tax on pensions

The third consideration concerns inheritance. Pensions aren’t usually liable for inheritance tax after the death of the pension holder, irrespective of whether the person died before or after the age of 75. That’s because they are not generally considered part of the deceased’s estate.

Even so, the tax treatment for the beneficiaries of a deceased person’s pension differs depending on whether they died before or after age 75. Should an individual die before the age of 75, then the beneficiaries of the pension could in most cases withdraw the funds entirely free of income tax.

But the situation is different when the pension holder dies aged 75 or older. In this case, any beneficiary of their pension will have to pay income tax at their marginal rate on any withdrawals. The marginal rate is the highest rate of income tax applying to your income after deducting all of your personal allowances and tax reliefs.

This third consideration can have significant tax planning implications. To start with, if the beneficiary inherits the entire pension in one single tax year and withdraws the money, then they could face a large income tax liability. This would particularly be the case if the pension inheritance drives them into the higher rate or additional rate tax bands.

Beneficiary access drawdown

But some pensions allow something called ‘beneficiary access drawdown’. This enables beneficiaries of pension holders who died aged 75 or older to draw on the pension bit by bit and staggered over time, rather than as a single lump sum. This could, depending on individual circumstances, help to reduce the overall tax burden.

So, if appropriate, you may want to ensure your pensions allow beneficiary access drawdown. But, if this hasn’t been done by the pension holder, then the beneficiary may be able to organise a beneficiary access drawdown arrangement for themselves. This may, though, be at the discretion of the pension provider. Even so, this can add an additional degree of complication at an already stressful and emotional time for your beneficiaries. So organising beneficiary access drawdown in advance could be particularly helpful here.

Something else to note is that, when you come to draw on your pension, you can withdraw 25 percent of it tax free (as a lump sum or in instalments). But if the 25 percent portion is not taken during your lifetime and you die aged 75 or older, then the tax saving on drawing down that income is lost.

Weighing up the options

On this basis, it may be appropriate to withdraw the 25 percent tax-free portion while you’re still alive. After all, it could leave you with more to pass on to your beneficiaries after death.

But there are other factors to consider before making this tax-free withdrawal. Once you withdraw these funds, they could then become liable for inheritance tax after you die. The inheritance tax rate is 40 percent, so your beneficiaries may end up paying more in tax than if you’d left it in the pension (as the pension is not considered part of your estate for inheritance tax purposes).

There can be significant tax planning implications for pension holders when they turn 75, both for themselves and for the beneficiaries of their estate and pensions. These implications can be quite complex and you may benefit from seeing a financial adviser. At Schroders Personal Wealth, one of our key principles is to have regular reviews with an adviser. This can help ensure your financial plans align with your changing circumstances.