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The evolution of age 75

Author Image The Technical Team
7 minutes read
Last updated on 24th Dec 2019

Overview

Seventy-five years from your date of birth has always been your 75th birthday. But when it comes to pensions and age 75, like most things pension-related, it’s evolved over the years.

Let’s concentrate on money purchase arrangements, and cast our minds back to pre-simplification days. Almost everyone had to secure a pension by their 75th birthday (if you know who didn’t need to, then you should probably get out a little more).

Pension simplification was a game changer

Then things got simpler with pension simplification. Drawdown in those days was called unsecured pension, and if you weren’t already in it immediately prior to your 75th birthday, then you were deemed to be in it. After A-day there was still the requirement to secure a pension, so on your 75th birthday you secured your pension as an Alternatively Secured Pension. Secured being a bit of a misnomer, as there was no guaranteed income purchased. It was unsecured pension with more restrictive limits and other rules. In particular, lump sum death benefits that weren’t paid to charity suffered an 82% tax charge, making it not very attractive.

April 2007

Those who were deemed USP immediately prior to their 75th birthday, stayed ‘in suspense’ and didn’t move into ASP, as long as the scheme had lost touch with them. If traced, they got the options available at age 75.

Not much simpler! Alternatively Secured Pensions had never been popular with anyone, individuals and policymakers alike, and 22 June 2010 saw their demise. No-one would ever have to secure a pension at age 75 again. There was an interim rule where the switch to ASP was moved to age 77 from age 75. This was creating the breathing space for two key rule changes from April 2011. At this point, all USPs and ASPs were unified as drawdown pensions under the same rule. More fundamentally, the requirement to take your tax-free cash prior to age 75 was removed, allowing people to now stay unvested beyond their 75th birthday.

April 2011

Technically was ‘pension freedom’ – as from then you never needed to take any benefits (or be deemed to have taken them).

This period had two areas that remained unchanged.

There was a test against the lifetime allowance at age 75:

  • growth on any funds designated as drawdown; or
  • the value of the deemed designation to drawdown immediately prior to the 75th birthday; or
  • the value of unvested benefits at the 75th birthday.

Or any combination! This LTA testing has remained the same to this day. 

Pension freedom came along and changed this second area from April 2015

The second area that remained unchanged, was the fact that death benefits got poorer, through higher taxation, when you entered drawdown or reached age 75.

Pension freedom came along and changed this second area from April 2015. Prior to this, entering drawdown moved you into a reasonably harsh environment for death benefits. Only dependants could continue in drawdown or buy an annuity, so lump sums were common and when paid the tax was penal – reaching 55% at one point (82% for some ASP lump sums) Post-pension freedom, anyone could continue with pensions, and the trigger to move into the taxed death benefit environment was now age 75 and not crystallisation.

Where death occurs post-75, withdrawals are subject to the beneficiary’s marginal rate of tax, or 45% if paid to a non-qualifying individual, like certain trusts or to the estate.

So we find ourselves at age 75, a key point for financial planners. The LTA test arising and change in death benefit taxation will need to be dealt with.

Things to think about with the LTA test

The test is relatively straightforward. For unvested money the fund value is used. Drawdown differs! With drawdown, if the full fund value were used, this would cause double taxation – the fund would have been tested twice on entry then again at 75. There is a ‘prevention of overlap’ rule to prevent the double taxation, so from the age 75 fund value you can deduct the amount originally designated to drawdown.  

If there is an LTA excess, it will be taxed at 25%, as the money is being retained in the pension. The scheme will deduct this and pay it to HMRC. Any withdrawals from the net amount will be taxed at the marginal rate as usual. 

This means that where there is a lifetime allowance excess, the overall taxation on that excess will be as shown below.

Let’s assume a £1,000 excess:

LTA charge

Tax status of member beneficiary

Income tax

(on £750)

Overall taxation

£1,000 x 25%

= £250

20%

£150

£400/£1,000 = 40%

40%

£300

£550/£1,000 = 55%

45%

£337.50

£587.50/£1,000 = 58.75%

 

Where there is sufficient LTA, then there is not much to be done.

Your 75th birthday is a single point in time (unless you’re the Queen of course) so, where there is going to be an excess and there are multiple arrangements, there is an advice point. The member will need help in deciding the order in which the tests should be done. The relative merits of each arrangement for the member’s circumstances should dictate, eg pots with guarantees might be tested first, so the LTA charge is taken from the pots without guarantees, or drawdown pots tested last to suffer the tax charge on a pot of money 100% taxable, instead of unvested pots where tax-free cash may still be available.  

Any funds destined to be over the lifetime allowance which can be accessed at a lower tax rate than the overall taxation above, may be withdrawn and held to spend or passed on to beneficiaries; minimising the charge maximises the fund.

Likewise, if currently under the lifetime allowance but projecting to be over it, earlier action might be beneficial where a crystallise-and-withdraw strategy gets access to the funds for the member or their beneficiary, at a rate lower than the overall rates above. 

It might be simple. It might be complex. It might just need advice!

Things to think about with the death taxation change

The change is simple. If the member dies the day before their 75th birthday, death benefits are paid tax-free; and after, they are taxed.

What needs to be considered here is access to tax-free money from the pension prior to age 75. This could be the (usual) 25% tax-free cash available to the member, or perhaps 100% if you are dealing with someone in beneficiary’s drawdown who currently has tax-free access to the total pot.

Where maximising death benefits is important, then withdrawing what is available tax-free for passing on to the family will maximise return. As I covered in the last edition of Oracle, what’s the point of your beneficiaries paying tax on all your investment, when they need only pay tax on the growth?

Clearly the identification of any IHT issues outside the pension will put a different spin on the considerations above, and a more complex approach alongside IHT planning will be required.

As we look back on the evolution of age 75, you could probably say the main evolution is it’s gone from fairly straightforward with limited advice opportunities, to a fairly complex advice point for many!

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