Age 75 has been an important milestone in pension rules since A day in 2006. It was the latest age at which a compulsory annuity purchase was required (prior to Pensions Freedoms). It's arguably it’s long been an arbitrary line in the sand, noting that life expectancy has been on the increase for the last 20 years, but this trigger age has remained unchanged.
Under previous lifetime allowance (LTA) and pension accumulation rules, age 75 triggered various benefit crystallization events, including a test for unused LTA, and any personal contributions made after age 75 would not benefit from tax relief. Now that the LTA has been abolished, it’s my view that age 75 has become far less important when it comes to pensions.
The regulations around death benefits, however remain… for the time being at least.
Changes are coming in terms of inheritance tax and pensions, with the rules eagerly awaited by the industry and clients alike to enable such huge changes to be implemented before April 2027. Under the new rules, pensions will be in scope for IHT although exact mechanisms, and any protections or new limits, are to be confirmed.
As it stands, the tax treatment of death benefits is dictated by the magic age 75 number. Those that pass away before age 75 will be able to pass their pension to their beneficiaries tax free. Death after age 75 results in beneficiaries paying tax at marginal rate on death benefits. Any unused lump sum and death benefits allowance also falls away on death of a member, which will drive a natural increase in pension lump sum withdrawals ahead of age 75.
HMRC’s technical consultation outlines that the taxation of death benefits will be unchanged post implementation of the proposals. Therefore, it might be that the age 75 trigger will need to remain in place. Irrespective of this however, increasing life expectancy means that the Government should review whether age 75 is the right point at which to trigger a change in pension rules applying.
Within the consultation, there is the suggestion that double taxation will apply to beneficiaries when receiving pension inheritance, in that IHT will apply at 40% but any pension withdrawals will also be taxed at the beneficiaries’ marginal income tax rate. This is unfair, and for this specific purpose the age 75 trigger should be removed, even if it remains elsewhere in pension rules.
The risk of removing the age 75 cliff edge for pensions might be in relation to tax relief on contributions post age 75. For the majority of clients, they are likely to have accessed their pension before age 75 and would therefore be subject to the MPAA in any event should they wish to continue to contribute to their pension.
In addition to increasing life expectancy, it’s reported that more people are returning to work following a period of temporary retirement, and that people are needing to work into later life due to financial pressures.
The lack of tax relief on contributions is likely to be a deterrent to retirement saving however this is likely to be less critical than younger generations saving for retirement as the period for which funds need to be accumulated is shorter. With the IHT rule change overlay, you would expect fewer people to have the desire to place further funds in their pension, absent of the tax benefit for their beneficiaries on passing.
The age 75 rule creates additional confusion and complexity to pensions however it would seem to be too greater a revenue generator for the government to simply remove.
The best outcome is that the new rules relating to IHT and pensions are clear as to the tax implications of passing wealth on a member’s passing and this is in the government’s hands to deliver. What is clear is that the age 75 trigger needs to be reviewed to take into account modern working patterns and financial demands, and longer life expectancies.
In my opinion, the age 75 trigger is an anachronism, and arguably the failure of Rachel Reeves to address this to date has perpetuated an arbitrary and complicating factor in the pensions planning landscape. It would have made far more sense to have addressed this, to give those that are planning for retirement and their beneficiaries ample time to adapt to the incoming changes.
Martin Tilley is chief operations officer at WBR Group