The pension strategy of successive generations of savers means they have built retirement plans that come to fruition when they stop work – often the time when they can start claiming their state pension, currently at age 66. But many pension experts now argue that this isn’t quite the right approach; instead, they advise, 75 should be the pivotal age in your retirement planning. That’s not to suggest everyone is going to have to work until 75, although many savers undoubtedly do intend to work well past state pension age. Rather, it’s the way the pension system works today – and the way we now live – that makes your 75th birthday such a significant moment.
It’s the popularity of income drawdown that has really changed advisers’ approach. In modern times, the majority of people opt to draw an income directly from their pension funds once they decide to start cashing in their savings. The fund can be left invested to grow further – and, very often, savers continue paying into it. They may have reduced their working hours, for example, but still be earning an income.
However, under HM Revenue & Customs’ rules, you’re only allowed to keep making pension contributions that qualify for tax relief until you reach 75. Most pension schemes therefore, won’t accept new payments after this point.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Get 6 issues free
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
A related issue is that many pension schemes have restrictions on withdrawals of tax-free cash from pension pots. HMRC’s rules allow you to take up to 25% of your pension fund as a tax-free payment, either upfront or in instalments. But because of historic complexities, such as the lifetime allowance on pension savings, many schemes make this very difficult after 75.
75 – the pivotal age when it comes to pension strategy
Another factor to consider is the rules on passing on pension savings. If you die before reaching 75, money left in your pension fund can usually be passed on tax-free to your heirs; after age 75, they’ll pay income tax on any money they withdraw from your savings. And when pension savings become potentially subject to inheritance tax, from April 2027, the bill could be even more significant.
For these reasons, it increasingly makes sense to plan towards age 75, even if you intend to start withdrawing pension cash well before then. There are no certainties because everyone’s circumstances are different, but for many people it will work well to use pension and income-drawdown plans to maximise the size of their pension pots by the time they hit 75; thereafter, the focus should shift to “decumulation” – running the cash down as you live out the rest of your life.
Another point is that most people become more risk-averse as they get older – and many start to feel less confident in their ability to manage their finances. An income-drawdown arrangement might then no longer feel like the best way to draw cash from your savings; you may become anxious about the process of managing pension savings to continue generating income and to last for as long as you need the money.
Using your remaining savings to buy an annuity – offering a guaranteed lifetime income – could be a good move. And while you don’t have to make that decision specifically at 75, many advisers say moves from drawdown to annuitisation are particularly common around this age. You’ll also get a more generous annuity rate than you would have done ten years previously, say. You may even qualify for enhanced rates if your health has deteriorated.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Comments (0)