Although most of us have long since retired and taken an income from our pension, there are many people who have either not ‘taken’ their pension or have used Income Drawdown as an alternative to an Annuity.
If you are approaching 75 and have yet to take your pension, or chose an alternative option to an Annuity, there are some important things you need to be aware of.
No requirement to ‘take’ your pension or buy an Annuity
It is no longer mandatory to take your pension by the age of 75; nor do you lose your entitlement to a tax-free lump sum if you have not taken it by 75.
Since the rules changed in April 2011, you can now defer taking your pension and tax-free lump sum to any point after the age of 75.
Furthermore, there is no requirement, whatsoever, to buy an Annuity, indeed if Government proposals announced in the recent Budget, get confirmed, there will be no restriction on the amount of money you take from your pension.
Read more about the proposed changes to pensions by clicking here.
A word of warning though, if you die before the age of 75 your dependents can take all of your pension pot as a tax-free lump sum.
From the age of 55 any lump sum paid as a result of your death, will be taxed at a rate of 55%, including the money which could have been taken as a tax-free lump sum. It therefore makes sense to consider taking your tax-free lump sum before you reach the age of 75 to protect it from a possible 55% tax charge.
Any contributions you make to a pension after the age of 75 will not qualify for tax-relief. Therefore, if you are thinking of making additional contributions, you should do so before you turn 75, so you can benefit from the valuable tax-relief, which will otherwise be lost.
Pension contributions made by your employer after this age, including any made by a business you own or control, will still qualify for tax-relief, but won’t build up an additional tax-free lump sum.
Income Drawdown reviews
If you have taken an income from your pension pot using Income Drawdown, rather than an Annuity, your plan will have been subject to reviews every three years. It is this review which sets the maximum income you can take.
After the age of 75 these reviews move from every three years to annually. This means the maximum income you can take will change annually, which may cause you greater uncertainty and possible cashflow issues.
Following the recent Budget it is proposed that from April 2015 there will be no cap on the amount of income an individual takes from their pension fund in any single year.
Lifetime Allowance test
The Lifetime Allowance was introduced in 2006. Simply put, it means that unless you have applied for one of the various forms of protection, if your pension fund increases above the Lifetime Allowance you will have to pay a tax charge.
Currently at £1.5 million, the Lifetime Allowance will drop to £1.25 million on 6th April 2014.
If you went into Income Drawdown before 6th April 2006 you are exempt from this test. However, if you started Income Drawdown after this date, your fund will be compared again at age 75 to the Lifetime Allowance and subject to a tax charge of any excess, providing of course you have not applied for protection.
For those people with large pension funds, careful planning, well before the age of 75, is needed if a tax charge is to be avoided.
Aligning Income Drawdown reviews
Mandatory Income Drawdown reviews can be time consuming and potentially costly, with fees often charged by the pension provider and adviser. If you have multiple Income Drawdown plans, with different review dates, the cost of these reviews can rise significantly.
A useful concession is granted though at age 75 only, which allows someone with multiple Income Drawdown plans to shorten the review period on these plans to their preferred date and align the exact date on which all the plans must be reviewed.
As Income Drawdown reviews need to be conducted annually after the age of 75, this is a concession is important and could help to cut complexity and cost.
The benefits of this will clearly be negated though, if the proposals announced in the recent Budget are implemented without change.
Opportunities and threats at age 75
Of course most people have retired and ‘taken’ their pension well before the age of 75. But for those people who haven’t yet touched their pension pot or have used Income Drawdown, turning 75 can present both threats and opportunities.