“Will you still need me, will you still feed me, when I’m 64?” wrote Paul McCartney all those years ago.
But with Macca hitting the age of 75 earlier this year, if he were to update this song now I wonder where his concerns would lie? Perhaps with a focus on pensions, given that age 75 can be a watershed moment for those with pension savings.
Come together, right now
Pension regulation has changed so much in recent years that investors of all ages now have many more options regarding what do with their pension savings. This has led to many individuals consolidating all of their pension contracts into one modern contract, making values and investments easier to monitor and administer, while at the same time giving them access to all the new flexible ways of accessing their retirement savings.
By the same token, there will also be people who have not considered these options and benefits – benefits that could be lost if no action is taken before reaching 75.
Annuities and age 75
The impact that reaching age 75 has on your pension will depend on what type you’re in and what you’ve done with it so far. For example, you may have a defined contribution pension pot that you haven’t done anything with yet. On closer scrutiny of the contract, you may find it states you have to buy an annuity by the age of 75.
Or, perhaps you’re in an older style income drawdown scheme, set up before pension freedom reforms in April 2015? It may very well include a rule that you have to turn it into an annuity by that magical age.
Also, if you haven’t yet taken your 25 per cent tax-free cash from a pension pot, you might be barred from doing so after this point by the terms of an older pension contract.
What this all means is that you should check your pension arrangements carefully, to make sure you don’t lose out by letting this birthday pass without taking appropriate action.
Of course, it’s important to bear in mind that consolidating different pensions might not be right for everyone. You need to consider all the facts and decide if it’s right for you. A financial planner can help you take everything into account and look at the details of your different pension contracts.
Passing things on – your 75th birthday makes a difference
The tax treatment of any pension savings that could be passed on when you die will change at age 75.
If you die before the age of 75, your pension may be paid to the beneficiary of your choice either as a tax-free lump sum or to provide a tax-free income as income drawdown or an annuity. Any unvested funds will be tested against the Lifetime Allowance (normally £1M in tax year 2017/8).
However if you die after the age of 75, your beneficiary can take the pension as an 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 whether or not to take any tax-free cash from your savings before you reach 75. Taking tax free cash could reduce the future potential income tax liability of your beneficiaries, but 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 estate planning, so talk to an 1825 Financial Planner about using your fund to benefit your loved ones. There may be a cost for advice.
Testing the Lifetime Allowance
Another impact of your 75th birthday is that when you reach 75, any untouched pension savings and any drawdown funds over the original amount invested will be tested against your Lifetime Allowance.
The Lifetime Allowance is currently set at £1 million and is the amount that you can have in pension benefits without incurring a tax charge. You can read more about how this works in our guide to the Lifetime Allowance. It’s a complicated area though, so if you think you might be nearing the £1 million mark, it’s a good idea to have a discussion with your financial planner.
Hopefully you now have a little more understanding about the significance of age 75 and your pension, ‘who could ask for more…’
If you have any questions about what you’ve read here, please don’t hesitate to get in touch. You can reach us on Twitter or Facebook, leave a comment for me below, or book an initial meeting with one of our financial planners.
This blog and any responses to comments 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 2017. Investments can go down as well as up in value and you may get back less than you pay in.