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I note from our records that you will reach your 75th birthday shortly. This represents a key milestone in your pension scheme, after which some of the rules regarding your pension benefits will change. There are a few issues that I would like to bring to your attention in advance of this.
No Requirement to Secure an Income
Pension scheme members are no longer required to secure an income from their pension funds by their 75th birthday (for example by buying an annuity). Instead, you can defer taking pension benefits beyond age 75, meaning that you could choose to leave your fund unvested for as long as you want to. In addition, it is important to note that the right to take a Pension Commencement Lump Sum (i.e., your tax-free lump sum) is extended beyond the age of 75.
Lifetime Allowance Test
Whether you have started drawing benefits or not, your whole scheme will be subject to a Benefit Crystallisation Event (BCE) on your 75th birthday. In other words, your benefits will be tested against the lifetime allowance. The test will cover the growth in value of any drawdown funds that first came into payment after 6 April 2006 plus the full value of any unvested funds.
Further to the rule changes announced in the Spring Budget on 15 March 2023, no lifetime allowance tax charge can arise on BCEs falling in the 2023/24 tax year. However, the lifetime allowance used by the growth in drawdown funds is relevant when calculating the value of any Pension Commencement Lump Sum you take after your 75th birthday either from your SIPP or from another pension scheme.
If you have any type of lifetime allowance protection (for example enhanced, primary, fixed, or individual) please send us a copy of your certificate if you have not already.
In order to complete the lifetime allowance test we are required to value your fund.
We will write to you again shortly after your 75th birthday to confirm if any lifetime allowance has been used. After age 75, your pension benefits will not be subject to any further BCEs. The government also announced in the Spring Budget it intends to remove the lifetime allowance completely in April 2024.
Death Benefits
Death benefits payable to dependants and beneficiaries on your death after age 75 will usually be subject to income tax, regardless of whether your funds were vested or not. The death benefits from your pension will not be subject to Inheritance Tax. You should have previously nominated beneficiaries in relation the distribution of death benefits from your scheme, and I would like to remind you of the importance of keeping your nomination up to date. This is particularly relevant given the rule changes applicable after your 75th birthday.
Contributions
Any member contributions made after the age of 75 are not eligible for tax relief. As we do not accept non-tax-relievable pension contributions, I would like to remind you that we will not accept any member contributions (whether paid by you or someone else) after your 75th birthday. Employer contributions are still permissible and will be subject to the annual allowance as normal.
I hope that the above is clear. If you have any questions or require any additional information, please contact us on the details above. Alternatively, please speak to your financial adviser.
Yours sincerely
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Should Labour win the next election they have said they will reintroduce the LTA charge or some such.
Best wishes,
Steve