I’ve got £213,000 in my pension pot, what do I need to do before I hit 75? STEVE WEBB replies

In 2015 I put the £265,000 balance of my pension pot into a self-invested personal pension. Since then I have drawn down a total of £151,000.

At the moment I am drawing down £2,500 a month. The current value of the investments in my Sipp is £213,000.

I will be 74 in July this year. Is there anything I should be doing with my Sipp before I reach the age of 75?

Steve Webb replies: Reaching the age of 75 used to be a significant milestone when it came to the rules about pensions, but a lot has changed in recent years, and it is now less of an issue. 

But in this column I’ll run through the things which do still change and the things which no longer change on your 75th birthday.

Starting with the things that do still change, anyone who is still interested in paying into a pension can continue to do so after 75, but they will only get tax relief on their pension contributions until they reach the age of 75 and not thereafter.

Secondly, anyone who is still an employee up to the age of 75 (and earns more than £6,240 per year) has the right to demand that their employer enrols them into a workplace pension and makes an employer contribution. After the age of 75 this right ceases.

Third, in the sad event that you were to die before the age of 75, your heirs would be able to inherit the balance of your pension pot and take it out free of income tax. 

Once you reach the age of 75, any inherited pot would be subject to income tax when it was drawn out. In either case though, any pot would not normally count for purposes of inheritance tax.

Let’s now look at some of the things that used to change but are no longer affected by whether you are above or below age 75.

The first relates to turning a ‘pot of money’ pension into an income for life by buying an annuity. Prior to the introduction of ‘Freedom and Choice’ in pensions in April 2015, anyone who still had money sitting in a pot of money pension had to use it to buy an annuity (with some very limited exceptions) by the age of 75.

That rule has now been abolished. As a result you can, if you wish, carry on with your current approach by drawing a regular amount from your pension pot. 

(I should stress that I’m not advising whether you should or should not carry on as you have been, but simply explaining that there’s nothing about turning 75 – apart from the points listed earlier – which should affect your decision one way or the other.)

What about the Lifetime Allowance? 

The other thing which is changing with regard to turning 75 relates to the Lifetime Allowance. The LTA is, in simple terms, the limit on the total value of pension pot you can build up whilst benefiting from tax relief on the contributions.

Prior to the April 6 2023, turning 75 was what was known – in a bit of a mouthful – as a ‘benefit crystallisation event’. What this meant in simple terms is that pension money which was completely untouched (‘uncrystallised’) at that age was then scored against the LTA. 

In addition, where people’s ‘pot of money’ pensions had grown in value between first being taken and age 75, any growth in the value of the pot was also tested against the lifetime limit. If you exceeded the LTA, there was an additional tax charge.

As you may know, in the 2023 Budget the Chancellor announced that the Lifetime Allowance was to be abolished. During 2023/24 the additional tax rate on those who exceed the LTA was set to zero and in 2024/25 the LTA is abolished altogether. 

For the rest of the current tax year you may therefore still get LTA-related paperwork though the LTA charge rate is now zero. From 6 April 2024 there is no longer any pension ‘test’ at age 75.

Incidentally, you may be wondering what is so special about age 75?

The short answer is that a change in rules at age 75 was put into law around half a century ago at a time when people who reached pension age had a much shorter life expectancy than they do now. Unfortunately, as is often the case with pensions, some of the rules have still not changed despite all that has changed in the decades since then.