25% Tax Free Pension Lump Sum After Age 75

In April 2015, pension laws changed to allow people to not be forced to take an annuity (originally withdrawn 2011) or drawdown on their pension fund after age 75.  It also allowed that you retain your right to any pension lump sum too.  The 25% cash lump sum is tax free if you are UK resident, but it may be taxable if live overseas or are required to file overseas tax returns.

That said, there are several issues to watch out for:

• Just because the law allows you to keep access to the 25% lump, this does not mean your pension provider’s systems can cope with it so you may need to transfer your pension to another pension provider that does.
• Reaching Age 75 is a Benefit Crystallisation Event (BCE) for your pension meaning we must do several calculations to check whether you have exceeded the Lifetime Allowance (LTA) and if there are any excess tax charge penalties payable to HMRC.

What is the Lifetime Allowance (LTA)?

This is the maximum amount that you can build up in all pension funds throughout your life.  Currently, it is £1,073,100 and this is fixed for the next couple of years.  If your combined pension fund values (not the income) exceed this, then a tax charge is payable.  Any time you withdraw money from a pension fund is considered a BCE and we must do an LTA check.  Most people will not exceed the LTA but there are many that do.

Calculation of Maximum Tax-Free Cash Lump Sum at Age 75

As mentioned, reaching age 75 is a BCE, even if you are not withdrawing any pension benefits, so we must do a BCE lifetime allowance check.

• What is the % of LTA already used up for pensions you have taken before age 75?
• What % of the LTA is available at age 75?

And then, the maximum tax-free lump sum that can be taken any time or in ad hoc lump sums after age 75 is as follows:

The lower of:

• 25% of the remaining uncrystallised (untouched) pension funds.
• 25% of the % of available unused lifetime allowance amount.

Example 1.  Janet

• Janet has reached age 75.
• The Lifetime Allowance is £1.1m (it is currently £1.073m but for ease of this example we will use £1.1m). 
• She has untouched (uncrystallised) pension funds of £500,000.
• She has already used/crystallised other pensions before reaching age 75 of 50% of the LTA at the time of taking previous pensions.
• She therefore has 50% of the current LTA (£1.1m) available to her i.e., £550,000.

Calculation of maximum tax-free cash lump sum available after age 75 is the lower of:

• 25% of the remaining uncrystallised (untouched) pension funds = 25% X £500,000 = £125,000.
• 25% of the % of available unused lifetime allowance amount = 25% X £550,000 = £137,500.

Example 1 Result:  The maximum Janet can take as Tax Free Lump Sums after age 75 is £125,000 and can be taken at any time or in ad hoc withdrawals or left alone.  The remaining balance can be left in drawdown to hopefully grow and taken in regular or ad hoc payments with the balance left as an inheritance for ‘loved ones.  or buy an annuity or leave it all invested as an inheritance.  Any balance left to loved ones will be taxable and subject to her ‘loved ones’ own income tax position.

Example 2.  Roger

• Roger has reached age 75.
• The Lifetime Allowance is £1.1m (it is currently £1.073m but for ease of this example we will use £1.1m). 
• He has untouched (uncrystallised) pension funds of £700,000.
• He has already used/crystallised other pensions before reaching age 75 of 50% of the LTA at the time of taking previous pensions.
• He therefore has 50% of the current LTA (£1.1m) available to her i.e., £550,000.

Calculation of maximum tax-free cash lump sum available after age 75 is the lower of:

• 25% of the remaining uncrystallised (untouched) pension funds = 25% X £700,000 = £175,000.
• 25% of the % of available unused lifetime allowance amount = 25% X £550,000 = £137,500.

Example 2 Result:  The maximum Roger can take as Tax Free Lump Sums after age 75 is £137,500 and can be taken at any time or in ad hoc withdrawals or left alone.  The remaining balance can be left in drawdown to hopefully grow and taken in regular or ad hoc payments with the balance left as an inheritance for ‘loved ones.  or buy an annuity or leave it all invested as an inheritance.  Any balance left to loved ones will be taxable and subject to his ‘loved ones’ own income tax position.

Don’t forget though, if Janet or Roger’s existing pension schemes do not have systems or cannot cope with tax free lump sums after age 75, their pension funds will need to be transferred to a new pension company that does offer tax free lump sums after age 75.

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