Tax  

Should age 75 still be a pensions milestone?

Should age 75 still be a pensions milestone?

Pensions still revolve around two key milestones: age 55, when benefits can be accessed, and more importantly, in my opinion, age 75. This is because of the raft of choices and decisions consumers are forced to make at this point.

It has not really ever been clear why government persists with 75 as the precise age at which these choices happen, other than the need for an upper age limit. It may change in the future as we all live and work longer, but in the short term this looks unlikely.

For this reason it is important to address the issues facing consumers at this pivotal age of retirement planning.

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Contributions

Contributions to pension schemes tend to stop at age 75, although this is only really relevant for personal contributions because individual tax relief ceases at this juncture. However, in theory, it is possible to pay gross personal contributions to a pension scheme, and as they are not eligible for tax relief they wouldn’t be tested against the annual allowance.

Employer contributions can continue after the age of 75 while retaining tax relievable status, so would face the annual allowance test. This is despite the fact they won’t ever be tested against the lifetime allowance (LTA).

There may well be scheme rules in place to stop any contributions after the age of 75 or higher, so if this is something that may be of interest to clients it is wise to check before any funds are sent to the scheme. These additional contributions won’t be tested against the LTA at any point and the employer should still receive corporation tax relief if they meet the “wholly and exclusively” test, just like any other contributions.

Default fund switches

Default fund switches have become less frequent since the advent of pension freedoms. Nevertheless, they still happen, and therefore scheme documentation should be checked thoroughly to ensure funds aren’t moved into cash or a money market fund in the run up to age 75, or a selected retirement date held on the provider’s systems. This could lead to a client’s funds being withdrawn from the market at an inopportune time, as well as the possibility of additional costs.

Schemes that do operate with a default switch may well only offer an annuity at retirement: the switching process exists to offer protection against last-minute fluctuations in the market. If an annuity isn’t going to be the correct product to provide the client with retirement income, then dealing with this issue sooner rather than later is key.

Access to transfers

Despite its increasing popularity, a significant amount of schemes still fail to offer drawdown. In this scenario, a client wanting drawdown would need to transfer to another scheme. However, even more schemes don’t operate beyond age 75, and as a result would insist the client buys an annuity at age 75 or transfers out beforehand. It is best not to leave funds in these schemes until the last minute, because if the transfer hits a snag and isn’t completed before the client’s 75th birthday, an annuity purchase may then be the only option. It may seem unfair, but this outcome is often dictated by scheme rules and the necessary systems may well not be in place to process the transfer after this date.