HMRC has confirmed that from age 75, state pensioners will no longer receive tax relief on personal pension contributions. This change, which takes effect immediately upon reaching that age, means that many pension schemes will stop accepting new contributions from members once they turn 75, according to tax experts.
What changes at age 75?
The cessation of tax relief on personal contributions is the most significant shift, but it is not the only one. Age 75 also marks a critical point for death benefits. Currently, if a pension holder dies before reaching 75, their beneficiaries generally do not have to pay income tax or inheritance tax (IHT) on the inherited pension wealth. However, if death occurs at age 75 or older, beneficiaries typically must pay income tax on any money received from the pension, although they are usually exempt from IHT on those amounts.
Justin Rourke, a tax expert at Armstrong Watson, highlighted the importance of this milestone: "Turning 75 marks a point where several important pension changes occur. Perhaps the most notable change is the cessation of tax relief on pension contributions, however, the treatment of your pension upon death changes at 75 and the opportunity to take a tax-free lump sum is also affected."
Tax-free cash after 75
While individuals can still take their pension's tax-free cash after turning 75, the rules become more complicated and potentially less favourable. Some pension providers may not allow members to take tax-free cash after this age, experts have warned. This adds another layer of complexity for those planning their retirement finances.
Inheritance tax changes from April 2027
Looking ahead, a significant change is scheduled for 6 April 2027. From that date, unused pension funds and certain death benefits will be included in the deceased's estate for IHT purposes. This means that pensions will no longer be entirely outside the scope of inheritance tax, potentially increasing the tax burden on estates that include pension wealth.
What about those still working at 75?
For those who continue working beyond 75, there is some good news: employers can still make contributions into their pension, provided these contributions meet tax rules. However, the lack of tax relief on personal contributions may make it less attractive for individuals to add to their own pension savings after this age.
Contribution limits before 75
Before turning 75, individuals can receive tax relief at their marginal rate on pension contributions up to £60,000 per year or 100% of their earnings, whichever is lower. This generous allowance encourages retirement saving, but it ceases to apply to personal contributions once the 75th birthday passes.
Rourke added: "Before turning 75, you can receive tax relief at your marginal rate on pension contributions up to £60,000 per year or 100% of your earnings, whichever is lower. However, while you can still continue to make contributions to your pension after you turn 75, you will no longer benefit from tax relief on personal contributions."
Planning for the future
These changes underscore the importance of careful pension planning as retirement approaches. Individuals approaching 75 should review their pension arrangements, consider making additional contributions before the cutoff, and seek professional advice to navigate the complex rules around tax-free cash, death benefits, and the upcoming IHT changes.
