Many pensions allow you to take tax-free cash after you reach the age of 75, depending on the rules of the scheme. However, it may be more tax-efficient to take this cash before you reach this age, especially in view of the upcoming pension changes. We look at your options if you’re approaching or over this age and you want to use your money in a tax-efficient way.
Why is age 75 important in pensions?
Although the lifetime allowance age‑75 tests no longer apply, this age still remains a primary planning milestone. When you reach the age of 75, you can still take tax-free cash, but soon unused pensions will be included within taxable estates. From April 2027, most unused defined contributions pensions and death benefits will be taxed as part of an estate.
Tax‑free pension lump sums are assessed under the lump sum allowance (LSA) and lump sum and death benefit allowance (LSDBA). In the UK, you can usually take up to 25% of your pension as tax-free cash, subject to the lump sum allowance. The key issue is what happens if you die. Pension death benefits are generally tax-free if you die before 75, but taxable at your beneficiary’s marginal income tax rate if you die after 75.
Taking tax-free cash before 75 could reduce the taxable amount left in the pension, especially if you’re worried about leaving money to non-spouse beneficiaries. However, this will depend on your income, your spouse’s position, your beneficiaries, and whether you have any protected tax-free allowances.
Will pensions be subject to IHT and income tax?
When you pass a pension onto a spouse, there’s usually no Inheritance Tax (IHT) due to interspousal exemptions. However, the whole ‘pot’, including the 25% tax-free sum, will be taxed at the beneficiaries’ marginal income tax rate for withdrawals.
No tax-free benefits can be paid on death after age 75, so your beneficiaries will usually pay income tax on what they inherit. Therefore, if you’re going to take tax-free cash from a pension, it could be sensible to do it before this age. Death benefits from pensions are generally more tax-efficient.
You can still usually take tax-free cash after 75, but the tax and estate-planning advantages are often weaker, and some schemes may restrict it. Some pension plans allow tax-free cash after this age, but you’ll need to check the scheme rules as this varies across providers. However, if you don’t need the money soon, then taking it before 75 might prove more beneficial in terms of IHT and income-tax outcomes for your family.
Using tax-free cash after 75
Taking your tax-free pension sum after 75 could be useful if you need the money for spending, care costs, debt repayment, or investment flexibility. You might also want to use it to support you with these costs in the future.
If you’re 75 and need the money for current spending, or if withdrawal is likely to push you into a higher tax band, then keeping it in the pension might be more suitable. If leaving funds in your pension could mean paying tax on withdrawals, then this might be a better alternative. However, this decision will depend on your current income tax band, rather than age alone.
The tax amount will depend on whether you have already crystallised benefits and how much lump sum allowance you have left. It will also depend on who you’re planning on leaving your money to. Check with your pension provider or a qualified pension adviser before taking any action.
Financial Planning and Pension Advice, West Bridgford
Are you aged 75 or over or perhaps you have a parent around this age? It’s worth discussing your options to see whether taking the tax-free sum before or after 75 is a suitable option. The upcoming pension changes could have a big impact on people’s retirement planning.
At Balance: Wealth Planning, we can provide you with expert guidance on pension planning and IHT advice. Our team of highly qualified financial planners include several Pension Transfer Specialists. We will review your pensions and financial position to help you check your options, so you can make an informed decision about your pension savings.
Get in touch for financial planning and pension advice.
Sources:
https://www.gov.uk/tax-on-pension/tax-free
https://www.gov.uk/tax-on-your-private-pension/lump-sum-allowance
https://www.standardlife.co.uk/retirement/options/tax-free-cash
