Following changes in 2011, Pensions legislation no longer requires you to buy a lifetime annuity, or take any pension commencement lump sum (PCLS), at age 75. However, for those who remain invested in pensions via drawdown plans or uncrystallised pension policies, and are approaching that magic age of 75, this presents two key decisions:
- Taxation of lump sum death benefits after age 75. From that point onwards a 55% tax charge will apply to any lump sum death benefit paid from pension savings, whether untouched or in drawdown (this was the main reason why a client of mine recently crystallised his benefits).
- Lifetime Allowance test at age 75. Pension savings that clients have built up which are not providing a lifetime annuity or scheme pension will be tested against a client’s available Lifetime Allowance at 75. Once the test has been carried out there will be no further Lifetime Allowance test on the value of those savings.
This may well influence your choices as to how much, and when, you decide on taking income from your remaining pension savings.
Whilst pension legislation now allows pension policy holders freedom from enforced annuity purchase at age 75, not all of the pension policies in which those people’s savings are currently held actually allow this flexibility. Many older, legacy, pension products were designed with systems and policy terms that reflect the old restrictions that applied to earlier the legislation, and in many cases those terms will not be updated and will still dictate what clients can do with those policies.
For some it might mean that annuity purchase becomes the only income solution available at 75, whether the pension savings are in drawdown or not. For others it could even mean a worse-case scenario, as recently reported in a case in the Daily Telegraph, that a client could lose all options to be provided with authorised benefits from pension savings, resulting in a 55% tax charge being applied to the total capital value of those savings that were paid after age 75.