138- Why Age 75 Matters

Turning 75 plays a significant role in your financial plan, and more specifically the tax efficiency (or tax inefficiency) of your affairs. 

Whether this applies to you or someone close to you, following this episode you'll understand and appreciate the nuances of why turning 75 matters and impacts: 

• Pension tax relief on your contributions,
• Death income tax benefits pre and post age 75 and, 
• Considerations around Inheritance Tax planning, and how the changes due to come into effect in April 2027 muddy the waters somewhat. 

It's a complex one money nerds, but arming yourself with this knowledge could save you, or a loved one, £000's in unnecessary and often avoidable taxes. 

Join Benjamin Mitchell (themoneyscot), serial hater of financial jargon, as he helps make your finances clearer and ensures you never make another financial mistake.

Getting on top of your personal finances doesn't need to be complicated or scary. Arm yourself with the only knowledge you need to transform yourself from money novice to money nerd! 

Take my 5 minute retirement assessment (can you already afford to retire?) 🚀


Disclaimer - please note that nothing in this podcast can be relied upon as financial advice and the content is provided purely for information and guidance purposes. Please seek independent, regulated financial advice relevant to your situation.

Transcript

SPEAKER_00 0:12

Hello, money nerds, and welcome to Heads Up on Money. This is the penultimate show before the end of the 25-26 tax year. But I'm going to part the tax year end planning rhetoric for this week's episode. Have done a recent episode on the tax planning that you should be thinking about as we near the end of the current financial year. Arguably, if you're only getting around to doing this stuff now, you potentially have left this a little too late. But all hope is not lost. Speak with your own investment platform provider or ISA provider, pension provider to understand if there is some end-of-year tax planning that you can still do. It may not be too late, money nerds, but as always, really get the discipline to tackle this stuff as soon as possible. So what I'm going to talk about in today's episode is a little more nuanced, a little more specific, but arguably a whole lot more important. So I'm talking about the age 75 and where that fits into your financial planning. It's a really critical age that determines lots of different caveats and rules around your general financial planning, and whether or not you are nearing that age yourself, or you know someone who is perhaps a parent, grandparent. It's really important. We're all going to know someone in our lives who is round about age 75, whether that's just past it or nearing it. And there's some critical things you need to be thinking about when it comes to your financial planning that so many people are totally ignorant too. And through no fault of their own, because this stuff, as always with money, is not communicated to us. We're not educated about this stuff, and as a result, we fall into tax traps and costly investment mistakes. I'm going to cover it in this episode. So we're talking about the age 75 and why that matters for your financial plan. Before I do get into this slightly technical episode, it's a quick call-out as always to say money nerds, if you are getting value from Heads Up on Money, if you are enjoying my rants every Friday, then please do like, subscribe, depending on where you are listening to this, leave a comment. It really means a lot to me. It helps to get the podcast up the money and finance charts and gets more money wisdom to more people. I really do appreciate it. Thank you so so much. So let's get into this one episode 138. Oh my god, I can't believe it. Can't believe we've been 38 episodes now past the hundred mark. Thank you as always for your support, money nerds. We're talking this week the things you should be thinking about when you reach age 75, or the things that the people in your life should be thinking about when they reach age 75. So there's a lot of weird rules in our personal finance system, in our taxation system, that probably make you scratch your head and think, what the hell is the logic behind that? And so a lot of the stuff I'm going to cover today, you're probably going to be questioning that. And the reason why this is so confusing and so illogical is by the very nature of successive governments building upon the rules implemented by previous governments, it becomes a bit of a let's say a car crash. That's the polite version of what I'm trying to say here. And it becomes very illogical. And and one of those things that is the height of illogic is age 75 rules when it comes to your financial planning. Because a lot of things in financial planning, regardless of your age, you are essentially have the same benefits available to you. Let's use an example. Everyone has a capital gains tax exemption currently sitting at£3,000, which means you can realize capital gains in the tax year to the tune of£3,000 before you pay capital gains tax. Let's say individual who is£25, they have the same capital gains tax exemption. Contrast this with an individual who is 79 who is selling some shares, they've got the same capital gains tax exemption. We all pay income tax at the same marginal rates of income tax regardless of our age. Of course, here in Scotland we have got many more tax bans than south of the border in England, but the premise of our age really is that that doesn't determine things. Now, when it comes to some pension rules, there is some variation in how your age plays out. And what I'm getting at specifically here is when you turn 75, some of the rules, some of the tax benefits, they change fairly drastically. And as a result, many people in their mid to later years of retirement sleepwalk into this trap and they're totally oblivious to it. Because this stuff really is getting into the weeds of financial planning. It's a little more technical than some of the episodes I release. And unless you are in the world of financial planning, if you are a financial advisor or financial planner, you'll be in this world. And if you are a proper finance geek who loves this stuff, you'll be in this world. But for most money nerds, you know, you're listening to Heads Up on Money, just wanting to get the key points, the key facts to make sure you take ownership of your financial future. And this stuff probably will not come onto your radar. So I'm going to try and frame it today in as short an episode as I can. It is technical. I'm going to try and keep it fairly simplistic to not lose you, to not lose your attention, to not lose your will to live. But this is really important stuff. And I appreciate many money nerds, you may be in your your mid-40s, perhaps retirement planning is just starting to come onto your radar, and you're thinking, you know, why on earth is this of consequence to me? I am 30 years away from age 75. Well, we all will know someone who is around about this junction in their life, and as a result, you need to communicate what I'm telling you today to them so that they are aware of this. Direct them to this episode of the podcast, or if you can, just relay some of the points that I'm going to make to you. Because it's really important for someone's financial plan knowing this stuff can possibly save thousands and thousands in tax and also complications when it comes to their financial planning. So let's get into this. Why does age 75 matter? Well, I've talked previously in the podcast about various cliff edges in financial planning, and that was mainly around income levels and the loss of certain exemptions like your personal allowance, tax-free childcare, the child benefit. That all is kind of very much related to income metrics. So the more you earn, the more you will lose these benefits. Whereas this today disregards income in many regards. We're talking just about your age, which is bonkers when you think about it. We are penalizing someone purely based on their age. And how this works in practice is at age 75, lots of the rules that existed to you that were available to you before age 75 suddenly change. The rules of the game suddenly change as soon as the clock strikes midnight on your 75th birthday. So as a result, you can start the week with certain exemptions, certain tax-free allowances, certain rules, and end the week with a completely different set of rules, a completely different agenda on your financial plan. And I'm going to try and get into the weeds today of what those changes are. The first one to be aware of is that the tax relief you receive on pension contributions suddenly stops. So as a reminder, we know by now, you know, I've done a hundred and well over 130 episodes of this podcast, you are fully au fa with how tax relief operates. When you pay into a pension, the government, so as to incentivize you to plan for your long-term future, will pay in an amount as well. So you pay in some of the tab and the government pick up the remainder, and that is what tax relief essentially is. Quick reminder: if you are a higher rate or an additional rate taxpayer, or anything really above the basic rates in Scotland, you will potentially be eligible to claim more tax relief back than what the government has paid into your pension through self-assessment. Previous episode of the podcast on that. I'm not going to get into the weeds on that one. But the idea here is you pay into a pension, the government pays in two. Brilliant. Well, that stops when you reach age 75. So if you're funding a pension up to 75, normally, let's say, generally speaking, if an individual perhaps has retired, let's say at 60, and they no longer have an income, a salary, or or more specifically, what's called relevant earnings for the purposes of pension contributions. So you do not have a suitable level of earnings to make a pension contribution. You can still pay in a fairly arbitrary amount, which is 2,880 in any one tax year, and the government will still credit some basic rate tax relief on that. So you can pay in 2,880 and the government will add in, oh, let me do my mental maths. I think it's£720, if that's right. Basically,£3,600 is the total amount that will go into your pension. Now you can keep doing that even if you've retired up until the age of 75. Why might you do that? You might ask. Why would you be paying into a pension when you are arguably a pensioner, you're a retiree? Well, you might have done it for estate planning reasons, you might have done it for the benefit of getting tax relief on the way in and being able to strip money out of your pension on the way out in a tax-sufficient way. It will depend upon your own financial situation. But for many people, even though they've stopped working, they will be continuing to pay into a pension, albeit they are capped at a fairly low amount. Now, when you reach age 75, this will elapse, this benefit elapses. So you can no longer pay into a pension and receive tax relief. Some people, some pension schemes will permit you to still pay in, you just won't get the tax relief benefit in addition, which arguably could make it less effective and a less good piece of planning. It might be possible if in the situation that you're working beyond 75 and you're working for an employer and they they could potentially still make employer pension contributions for you. But for most people, keeping this black and white is once you reach age 75, there's less of an incentive to continue paying into a pension. Before, there was arguably a greater incentive to continue doing that and even explore the options of paying in beyond 75 for inheritance tax planning reasons, because as I've talked about in the podcast, pensions have for a long time been held out with your estate. So the more wealth you hold in pensions, the better from an inheritance tax planning angle, because effectively you've got more wealth that is out with the net of inheritance tax. Now that is changing next year, April 2027, which means pensions are, you know, are they becoming less favorable. They're still the best wrapper we have available to them. I'm still um to us, apologies, I'm still massively pro pensions, but as of next year, they are not as lucrative as they were. And even more so for someone post-age 75, because in a year's time in April 2027, you will no longer be able to get the tax relief on the way in if you're over 75 now, and you will have some lesser favorable, let's call it, benefits from an inheritance tax planning angle. So age 75 tax relief on pension contributions stops. What's arguably a more important one because of the fact that most people who are, let's say, in their 70s will typically have no relevant pension income, so they're probably, if anything, going to be paying in this arbitrary£2,880 a year, and they're losing the ability to get the tax relief on top of that, which is you know not significant. It's not going to make a material impact to their financial plan. But what is a more significant trap around age 75 is the taxation of how the death benefits within your pension, a defined contribution pension, will work. Keeping this very simple, folks, is if you were to pass away before age 75, and your pension nomination death benefit form, which everybody should have and maintain and keep up to date, make sure you've got this with your pension provider again. Previous episodes of the podcast on that subject. If you need a deep dive on it, you effectively die before 75, and let's say your pension benefits were nominated to go to your spouse in the first instance, and your children if the spouse predeceases them. In that case, the benefits from your pension are payable tax-free. No income tax will be paid by the recipients of your pension. When you reach age 75, that completely changes. The recipients of your pension will pay income tax at their marginal rate of income tax. So bringing this to life, if you've got, let's say, um, an individual who maybe is widowed and they've got two children, and their children are doing well in their careers, they're higher rate taxpayers. So as a result, any pension withdrawals they may take would be taxable at, let's say, 40% income tax. If you die before 75, you die at 74, and you've got 100 grand in your pension, then they will potentially have access to that pension completely tax free. But if you die at 75, and let's say you die a couple of months after your 75th birthday, then they will pay marginal rate income tax on that pension if they choose to withdraw. Now obviously, if they've got their own financial planner, if they've got financially savvy knowledge about their money, then then they wouldn't take it all in one massive chunk because that would realize massive income tax liabilities. But using the extremes here, if if your offspring wanted to get their hands on the pension wealth in one chunk straight away, then if you die after 75, they could potentially pay in this example 40 grand income tax, leaving 60 grand to them. And you've not done anything to change this, you've you've merely just got older, you've merely got beyond the age 75 test. So it's absolutely mental. It's mental that the whole income tax regime on your death benefits changes significantly depending upon when you are, or sorry, depending on whether you die before 75 or after 75. Now, where this then links into is how your tax-free lump sum works with your pension. So again, keeping this very high level, you've got a pension pop, 100 grand. Typically speaking, again, there's caveats here with all things in financial planning. Typically speaking, a quarter of that is tax-free. That's your tax-free lump sum. You've probably heard it referred to, your lump sum allowance. You get a quarter of that tax-free, the remainder is taxable at your marginal rate of income tax. So if you're retiring at 70, you've got a hundred grand pension, you can take 25 grand of that tax-free. The remaining 75 grand goes into a drawdown pot, which you draw upon as and when you wish, but when you do, you will pay income tax at your marginal rate of income tax. And what I mean by that is depending upon what your wider tax affairs are like in that tax year. So if you've got defined benefit pension income, if you've got a state pension coming in, if you've got property, rental income, dividend income, all of this gets factored in, and your pension income that you take from your drawdown pot will bleed into that and you will pay their the prevalent income tax rate on the on the withdrawal. Now, where this kind of differs with your tax-free lump sum is when you reach beyond age 75, let's say, and you you pass away, and you hadn't used your tax-free sum, this effectively dies with you. Your beneficiaries, if you were to die at 80, and let's say using the example I'm going through here of a hundred grand pension, your beneficiaries don't get a lump sum allowance on that. They don't get a quarter of it tax-free, and then the resultant drawdown pot is taxable. Your lump sum tax-free cash, however you want to call it, dies with you. And this this presents an interesting planning opportunity when you get close to age 75. Because what we're trying to think about here is avoiding the higher amount of your pension continuing age 75 and beyond, because of the reasons I said around the differing income tax regimes before and post, sorry, before and after age 75. So many clients, and again, this is not advice because you need to think about the wider financial plan here. There's so many caveats and variations, I have to qualify that. But many clients, let's say they are 74 and they've got 100 grand in their pension, they're they're approaching age 75. There may be strong rationale to take their tax-free cash before age 75 and get less or sorry, get less of their pension continuing beyond age 75, with the rationale that if they were to die after 75, then they've only got 75 grand of a pension that's been carried over rather than 100 grand. But the the caveat here is that 25 grand that you've taken from the lump sum, that your 25 grand lump sum allowance, you have to do something with that in order for this to be a good bit of planning. So you've you've avoided the income tax charges and the differing income tax regime before and post age 75, but you then start to think about the inheritance tax planning angle. So this is where it gets really complicated, folks, because if you're taking your tax-free cash and it's just sitting in your bank account, you've just taken it out of your pension and you've put it into a bank account to avoid the income tax charges post and pre-75. The only way that becomes effective inheritance tax planning is if you spend that money or if you gift that money and then it entertains the whole gifting regime. Is that a chargeable lifetime transfer? Is it a pet transfer? Can you use an annual exemption? Seven years you need to survive, all of that minutiae that I'm not going to get into today. But the headline here is if you're taking your tax-free cash before 75 so you can avoid the pre and post-75 income tax regime nuances, then you need to think about this as an inheritance tax planning angle. Is it or isn't it going to be effective from that angle? And it's only going to be effective from that angle if you gift the money or if you do something material with the money. And where this gets really complicated is at the moment we're in a we're in a weird window between now recording this in March 2026 and the lead-in to next year, April 2027, and how pensions change for inheritance tax. As things stand at the moment, having money and a pension is a good thing from an inheritance tax planning angle because typically it will be out with your estate. Whereas in April 2027, the pension wrapper is less beneficial from an inheritance tax planning angle. So it becomes a little bit more black and white at that opportunity because then you're just presented with the income tax differing between pre and post-75. What I'm getting at here is regardless of whether you're 74 or 76, your pension will be in your estate for inheritance tax. But at the moment, for the next 13 months or so, it's a very interesting dynamic because you could be taking money out of your pension, your lump sum, let's say, to circumvent the income tax charges at age 75, but you could be moving wealth out of an inheritance tax planning inheritance tax free wrapper, the pension, into a non-inheritance tax-free wrapper, which is let's say your bank account. And that makes it quite difficult. I've got a client example, I looked at this for her earlier this year, and in effect we made the decision that yes, there are potential income tax benefits to doing it now, but the risk of her passing away in the next 13 months was considered to be fairly material, and taking the money out of the pension and bringing that into the net of inheritance tax for the next 13 months wasn't the route to go down. So again, we can get into the weeds here, folks, but the key thing I really want you to take away from this is at age 75 there are changes to how your death benefits will be treated, and that may mean that you may wish, you may not advise, folks, you may wish to take your lump sum allowance before you reach age 75, provided you're going to do something good with it. And when I say good, I mean inheritance. Tax efficient with it, you're going to spend it, you're going to gift it. It's not going to simply accrue in a bank account and you're taking your lump sum for the sake of it. Because as with anything's in your lump sum allowance, taking the bite of the apple all in one go maybe isn't the best route for you. If you think about it this way, is once you've crystallized your pension, which is horrible terminology, but effectively what I'm saying here is taking a bite from the apple. Let's say you've got 100 grand apple and you've bitten your tax-free cash from that, you get 25 grand and 75 grand goes to drawdown. Any growth in the pension thereafter, which should still be happening because you should still be investing in the global equities of the world, doing all the great stuff we talk about in every other episode of Heads Up on Money, it'll keep growing, but you are not going to get any more bites from that apple. You've taken the maximum bite from the apple. There's not going to be more tax-free cash available to you in the future. And if you do need to get your hands on your money at short notice, let's say, then because you've taken your tax-free cash and everything that's left is taxable, you've got less income tax flexibility and control over how much tax you pay if you've taken a bite all in one go. Whereas if you chip away at the apple over time, take little bites here and there, little chunks, that may be a more effective tax planning angle from an income tax perspective. So there's there's lots of things to be thinking about here. And it is quite complicated. I do appreciate that. But really, what I wanted to get to in this episode is just for you to be aware that there are subtle changes to how your pensions are dealt with from a tax angle when you reach age 75. It is less complex than it once was because you may or may not be aware that the previous death regime, let's call it that, around pensions, which was called the lifetime allowance, has been changed, has largely been abolished, and it's now called the lump sum allowance and lump sum death benefit allowance. You don't need to worry about the weeds here, folks, because it has got simpler than it once was, it's less punitive than it once was. But these age 75 triggers still happen, and many people are totally oblivious to them. But that's not you, money nerds. You hopefully will have got the grounding in this episode to understand exactly what happens at that age and what you should be thinking about. I'm gonna do a quick recap in a second because I realise I covered a lot here in fairly technical lingo, so I'm going to try and do a sweep up at the end and tell you what you need to be thinking about. Okay, that was a meaty one, I do appreciate. And some of it you may be thinking is just not worth the headache right now, given the age you're at. But as I said, you probably know someone who is close to this age or has just passed it. Because again, if they are let's say let's say your your your um your mum is 77, there still may be an opportunity for you to be thinking about this with her, or for her to be thinking about this herself, because as I said, you you may wish to let's say take your tax-free cash now in her lifetime, because if she can do something meaningful with that, uh it's beneficial because of the fact that if uh she dies, then the tax-free lump sum will die with her. So again, i if you're sitting here from the perspective of 75 has passed and the ship has very much sailed, that's not necessarily the case. There still can be meaningful planning to do here. So recap, recap, recap. Lots of things in financial planning, the cliff edges I talk about are related to your income. Well, we're talking not about income in this case, but more on age. When you reach age 75, the way that pensions work from an income tax angle change. Primarily, you no longer get tax relief when you pay into a pension, which may mean pension funding post age 75 is largely off the radar, particularly now that pensions are going to become less favorable from an inheritance tax planning angle. But arguably the far more important one to be aware of is how the death benefits are treated. If you die before 75, your beneficiaries will not pay income tax on the benefits they take from your pension. If you die after 75, they will. So therefore, as you are nearing age 75, there may be a rationale to take your tax-free cash and enjoy that money now in your lifetime because the logic flows that less of your pension will be continuing beyond age 75. In the event you pass after 75, there'll be less pension going to your beneficiaries and subject to income tax. But all of this needs to be carefully balanced with how pensions are treated around inheritance tax, and as again, the next 13 months provides an interesting window because pensions do remain inheritance tax free. But as of next April 2027, it's going to be more black and white, and therefore the argument and the considerations to be done here are purely from an income tax planning angle. The logic follows that in 13 months' time, if you have an ISA and a pension, then from an inheritance tax planning angle, they are very much like for like. If you pass away with 200 grand in an ISA, let's say this is above your inheritance tax exemptions, 200 grand in an ISA, 40% of that will be taxable at inheritance tax. If you've got 200 grand in a pension, 40% of that will be taxable against inheritance tax. It's same like for like. Where it differs is pensions and ISAs will be the same pre-75 because a beneficiary could receive an ISA tax-free and they can receive your pension tax free before 75, but after 75, there could be income tax complications for your beneficiaries. And this is where pensions could become quite inefficient in the state that your beneficiaries are higher or additional rate taxpayers, because they potentially could have to pay income tax and inheritance tax on those funds. So it really is an important consideration when you get to 75 and beyond as to what you want to do with that wealth. Are you going to spend it in your lifetime? And if you're not, then having it sit in a pension may not be as tax efficient as it once was. So there we go. Could go into a deeper dive on this, and I'm aware I've already taken up half an hour of your Friday. Going to try and keep it as high level as I can. I appreciate you may need to listen back to this one. But again, if you've any queries regarding any of this money nerds, please reach out to me. You've got my contact details in the show notes. There's a link there to get in touch. If I can give you some guidance, then I will. Obviously, I can't give you regulated financial advice no matter how much I'd like to. But if I can give you some pointers, some further things to be considering around this, if it's if it's hit a nerve in any way that is causing you any kind of financial anxiety or worry, it doesn't have to be that way. This is why Heads Uh on Money is here to give you the financial knowledge and to empower you to take control of this stuff so that you aren't stressed by it, so that money and wealth is not a stressful subject. I talked about in the podcast previously, some of the stuff with good financial planning is easy to take care of. Investing soundly, controlling your investment rate, all of that stuff is simple to enact, difficult to keep, enacted well, but that's simple to do. The stuff that I'm talking about here today, this is more of the minutiae, this is more of the weeds of good financial planning, and you probably should be seeking financial advice if some of this is of concern to you. So speak to your financial planner about this. If you're nearing age 75 and this has not come up on the radar with them, then what the hell are they doing for you? Bring this to your next agenda on the meeting with them, because it really is important stuff that could result in massive tax savings for you and your loved ones. I'm going to wrap it up there and I'm going to have a lie down. I'm sure you're the same money nerds, but thanks as always for listening. One week to go to the end of the tax year. We're nearly there, folks. 26-27 is almost upon us, and we start all over again. Thanks for your attention. Thanks for listening. Stay safe out there and have a great weekend. Bye.