Turning 75 is still a big event in pension planning terms. In the fourth of her tax-focussed articles for Professional Paraplanner, Jessica List, pension technical manager, Curtis Banks, looks at three key areas where the rules change once someone reaches their 75th birthday.
1. Contribution tax relief
Once a person turns 75, personal and third party contributions no longer qualify for tax relief, as they do not meet the definition of a ‘relievable contribution’. This also means that such contributions are not tested against the person’s annual allowance. It’s important to remember, however, that employer contributions would still be tested against the annual allowance as normal. Clients over 75 can also still be affected by the tapered annual allowance, money purchase annual allowance (MPAA), and carry forward rules.
While there are more and more people working up to and past age 75, contributions above this age are still relatively uncommon. It’s not unusual for pension providers not to accept any contributions from clients who have reached age 75. Where providers will accept post-75 contributions, they may only be allowed by exception. If you do have a client looking to make a post-75 contribution, or perhaps looking to continue with regular contributions after turning 75, it’s worth checking with their provider(s) to check for their requirements and any restrictions.
2. Lifetime allowance tests
There is only one benefit crystallisation event (BCE) that can take place after age 75, which relates to increases in scheme pensions in payment. For most people, the final tests against the lifetime allowance take place at age 75. There are three separate BCEs that a person might encounter:
- BCE 5 is probably the most unusual, and tests funds in a defined benefit scheme that have not yet been accessed.
- BCE 5A tests the growth in drawdown funds (above the value that was originally designated).
- BCE 5B tests any remaining uncrystallised/unused funds in a money purchase arrangement.
Clients with multiple pensions that will have BCEs on their 75th birthdays can decide on the order in which the BCEs are deemed to take place. If the client is likely to exceed their lifetime allowance overall, this means they have some degree of control over which scheme (or schemes) will be subject to a charge. This could be helpful where a client would prefer not to pay a charge from a defined benefit scheme, or perhaps where any required disinvestments would be less favourable from one scheme than another.
If a lifetime allowance charge arises at age 75, it will always be charged at 25%. The 55% lifetime allowance charge only applies where a client chooses to take a ‘lifetime allowance excess lump sum’ from pension funds that are over their lifetime allowance. This is only possible before age 75.
Remember that even though the final BCEs take place at 75, it’s still possible to take pension benefits, including tax free cash, after that date.
Let’s say that the lifetime allowance is £1m, and at age 75 a client had already used up 90% of her lifetime allowance and has £100,000 of uncrystallised funds remaining. The £100,000 is tested against BCE 5B and uses up the remaining 10% of the client’s lifetime allowance, and remains in the pension as ‘unused’ funds. A year later, the client decides to crystallise £50,000. Even though the client has actually used 100% of her lifetime allowance, for this purpose, she’s deemed to still have only used 90%. That means that the £50,000 is still within her deemed remaining lifetime allowance, and she can take 25%/£12,500 as tax free cash as normal. This isn’t an official BCE, but is deemed to use up a further 5% of her lifetime allowance. Another year later, the client decides to crystallise her remaining unused funds to drawdown, which are now worth £60,000. This time, she’s deemed to have used up 95% of her lifetime allowance: 90% from before turning 75, and 5% from age 76. Therefore the client has 5%, or £50,000, of lifetime allowance deemed to be available. The amount of tax free cash available is limited to 25% of the deemed remaining lifetime allowance. Therefore the client can take a further £12,500 of tax free cash, and the remaining funds go into drawdown. There’s no further lifetime allowance charge, as this isn’t an official BCE.
3. Death benefits taxation
The third key pension rule change at age 75 is how death benefits are taxed. If someone dies after turning 75, the death benefits become taxable. Where benefits are paid to individuals, those beneficiaries will pay income tax at their marginal rate on the funds they receive. It’s also possible for the ‘special lump sum death benefits charge’ of 45% to apply where benefits aren’t being paid to an individual – for example, to a trust or a company.
The amount of tax a beneficiary actually pays can be significantly affected by the type of death benefit they receive. This is because a lump sum death benefit will be taxed in one go at the point it is paid, whereas if a pension is set up for the beneficiary, tax is only paid on the income payments as or when they are taken. Clients over 75 may be particularly keen to make sure that their chosen beneficiaries will have the option to set up a pension. Some clients may also consider updating their expressions of wishes at age 75 in favour of lower earning beneficiaries, who may end up paying less tax overall.
While these areas will affect different people to different degrees, turning 75 is still a planning event to schedule in for all clients.