Do I Have to Take My Pension at Age 75?

Turning 75 is a big milestone when it comes to your pension funds. The main reasons for this are because it is the time when any uncrystallised pension is tested against the lifetime allowance, and when the tax treatment of your pension when you pass away changes. We’ll explain that in more detail in this article, but first, let’s answer the question of do you have to take your pension at age 75?

The answer to that is no, you don’t have to take your pension at age 75. For many people who can afford it, they will actually leave their pensions for as long as possible, due to the Inheritance Tax (IHT) benefits. Let’s look into all of this in a bit more detail.

What is the Lifetime Allowance?

The Lifetime Allowance is the maximum you can access from a pension scheme before paying penalty tax. The limit until 2025/26 is £1,073,100 and this means that if you have pension funds that are worth more than this, you could pay up to 55% in additional penalty tax when you withdraw the funds.

The way this allowance is used is that it’s calculated when you “crystallise” a portion of your pension. For example, if you want to withdraw £25,000 of tax free cash from your pension scheme, you would need to crystallise £100,000 to access the 25% tax free lump sum. The remaining £75,000 will go into a drawdown pot and will remain invested, but this process will lock in a percentage of the Lifetime Allowance (LTA).

In this example, the £100,000 that you’ve crystallised will have used up 9.32% of the Lifetime Allowance. As you access more of your funds, you will use up a greater percentage. Once it reaches 100%, any amount you withdraw from your scheme will have penalty tax applied at 25% for income or 55% for lump sum withdrawals. 

What is the Lifetime Allowance Tax Charge at 75?

So as outlined above, you pay either 25% or 55% as a Lifetime Allowance Tax Charge for crystallised pension amounts above £1,073,100. However these days you don’t have to take all your pension benefits before 75, or actually ever. Maybe you’ve got a lot of funds built up in ISAs that you can use for your living expenses, maybe you have rental properties or maybe you’ve just continued to work.

Either way, if this is the case then the government is satisfied in losing out on a potential chunk of tax. So to make sure they get their share, at age 75 they look at your pension and run the crystallisation calculation, and charge you 25% tax on anything above the LTA.

So if you had a pension that was worth £1,173,100 that you’d never touched, they would assess you as being over the LTA by £100,000 and then hit you with the 25% tax charge - £25,000. But it doesn’t end there. They also look at how much any funds you have in drawdown have grown over time as well.

So if you had already crystallised your full allowance a number of years ago, you may have used exactly 100% of the Lifetime Allowance. Because your full pension is crystallised, you might think that you’re off the hook and you don’t need to worry about the LTA tax charge at 75. Unfortunately, the government also looks at the difference between the amount you put into drawdown, and then if the current value is higher, they add that on as well.

Let’s quickly look at another example. If you happened to have a pension valued at exactly £1,073,100 and you crystallised the full amount, you would be at 100% of your LTA and wouldn’t pay any LTA tax charge. Say you took your 25% tax free cash, you’d then have £804,825 that would go into a pension drawdown account.

Fast forward 10 years, if you don’t withdraw anything from the portfolio, it could be worth £1,500,000. HMRC will then assess you on the growth of the drawdown over that time of £695,175, which at 25% the LTA Tax Charge would equate to £173,794 in tax. Ouch.

Do Defined Benefit Pensions Count Towards Lifetime Allowance?

Yes, Defined Benefit pension schemes do count towards the Lifetime Allowance. You may have seen a lump sum value on your statement called something like the Cash Equivalent Transfer Value (CETV). This figure is used to provide an estimate of the lump sum that would be available on a transfer to a Defined Contribution scheme, but doesn’t have any relation to the LTA.

For the LTA, the test is simply whatever the annual pension benefit is multiplied by 20. So if you had a Final Salary Scheme that was going to pay you £10,000 a year, you would multiply this by 20 to get the amount of £200,000 which would be counted towards your LTA.

What Happens to Pension Death Benefits After Age 75?

The other big difference for pensions after 75 is the way that they’re treated when you pass away. If you pass away before age 75, any benefits you have in a Defined Contribution pension scheme are passed onto your dependents free of tax. This means that they can receive the funds as an income stream or a lump sum, completed free of tax. There are some exceptions to this for older schemes, but generally this is the rule for new pensions or drawdowns.

If you pass away after you’re 75, the pension scheme will still pass to your beneficiaries, however they will be liable for income tax on the money they withdraw from the scheme. This is taxed at their marginal tax rate, and your tax rate prior to your death has no bearing on the tax that they will pay.

What Happens to Your Pension After Age 75?

So with all this said, what happens to your pensions after age 75. Well other than the information outlined above, nothing. If you have a Defined Contribution scheme, it will remain invested and you will be able withdraw the funds just as you could before age 75. 

The income situation is unchanged, in that you will continue to pay income tax on any money you withdraw from your scheme. Same with a Defined Benefit scheme. You continue to receive the payments as normal, and there are no changes that you’ll see once you turn 75.

Back to the original question, you also don’t have to access your pension at age 75. If you have a balance in one or more Defined Contribution schemes, you can continue to have them sit within the fund for as long as you live. In fact, it is often the best course of action for people with large levels of assets, as pensions sit outside the estate and therefore do not attract Inheritance Tax.

Because of this, it's often recommended that people utilise other assets such as ISAs, General Investment Accounts and Cash to meet their expenses before accessing their pension funds. Obviously, this balance will be different for everyone and it’s definitely an area that's worth seeking professional advice on.