Are your clients eligible for their free TV licence, but still saving into pension?
We are frequently asked about the rules for paying pension contributions after age 75. If you haven’t a Scooby, I’m happy to help solve the mystery machine of pensions law about this.
Not too long ago, when you reached age 75 any unused pension funds had to be turned in to a secured income (i.e. annuity), or converted to alternatively secured pension (ASP), now known as ‘drawdown’. This changed from 22 June 2010 reflecting the fact people in the UK are now living, and working, longer with the average person expected to live to celebrate several birthdays in their 80’s.
So what do you need to know if you have clients approaching, or who have reached, age 75 but intend to continue funding their pension, hoping to enjoy a non-penny pinching retirement?
Tax relief – personal contributions
Personal contributions are not eligible for tax relief after age 75. In the tax year an individual turns age 75 they need to plan to complete their pension saving before their special day. The standard tax relief rules apply so they will be entitled to tax relief on a pension contribution up to 100% of their relevant earnings in the tax year or £3,600 whichever is greater. Age 75 is the cut-off date for paying the contribution, but the whole tax year is used for the relevant earnings limit.
Let’s look at Daphne who earns £26,000 pa and will reach age 75 on 6 August 2018. On the 3rd of each month, Daphne pays £400 net to her personal pension plan. This works for monthly contributions paid from 3rd May to 3rd August 2018 inclusive (£1,600 net/ £2,000 gross in total for tax year 2018/19). Any monthly contributions paid from 3rd September 2018 will not be entitled to tax relief. However, Daphne could pay a total personal contribution of up to £20,800 net before 6 August, which would be grossed up by 20% tax relief the provider claims from HMRC directly to make a total personal contribution of £26,000 gross. So if Daphne wants to benefit from tax relief, then she would have to pay a lump sum of £19,200 net / £24,000 gross if she can fund this as a lump sum.
Beyond tax year 2018/19, Daphne is not entitled to any tax relief on personal contributions.
Tax relief – employer contributions
There is no age limit on corporation tax relief for employer pension contributions. The standard rules continue to apply, i.e. where the employer pension contribution satisfies the wholly & exclusively rule , it is an allowable expense for the purposes of the trade and will reduce the company’s corporation tax bill.
As always, tax relief is only one piece of the jigsaw. We then must check the member’s annual allowance limits. The annual allowance does not disappear from age 75. Although any personal and/or third party contributions paid after reaching age 75 are specifically exempted and will not use up annual allowance, the rules still apply to employer pension contributions. Your client may be subject to the standard annual allowance, the tapered annual allowance(high income clients), or the money purchase annual allowance(where pension benefits have been flexibly accessed). If an annual allowance excess occurs, then the member needs to report this and the relevant tax charge through self-assessment in the usual way.
We know the last lifetime allowance(LTA) test for BCE purposes takes place on the member’s 75th birthday (except for BCE3, scheme pensions which increase in payment above permitted limits, which can be tested at any age). However, there is still an LTA test when you come to take pension benefits from funds built up with contributions paid after age 75 was reached.
Again it’s the standard rules that apply. When you plan to use uncrystallised funds to provide pension commencement lump sum (with the attaching entitlement to lifetime annuity/ drawdown), or an uncrystallised funds pension lump sum (UFPLS), you need to check the member’s available lifetime allowance when they reached age 75. There’s no actual BCE but the reason for the LTA test is to make sure someone can’t receive more PCLS/ tax-free cash than they could have received prior to age 75. You are allowed to ignore the LTA used with the benefit crystallisation event on any unvested funds at age 75 when working this out.
Let’s look at Velma who turned age 75 on 1st April 2018. Prior to that date she had used 80% LTA. She has no LTA protection. She had remaining uncrystallised funds of £160,000, and no other benefits to be tested against the LTA. The £160,000 fund used 16% of the LTA.
In May 2018, her business paid an employer pension contribution of £40,000 towards her pension. This gives her a total uncrystallised pot of £200,000 (ignoring growth). The fact some of this is in respect of contributions paid before age 75 and some after doesn’t change how it’s treated next.
If she asks to take £200,000 of her pension pot as an UFPLS, the 16% LTA used at age 75 is disregarded. This means we treat Velma as having 20% LTA available and as the £200,000 requested as an UFPLS is within this amount (20% x 1,030,000 = £206,000) then she is entitled to the usual 25% tax-free and the 75% balance will be taxed as pension income.
If, instead of £40,000, her business had paid an employer contribution of £80,000, this would have increased her total uncrystallised funds to £240,000 (ignoring growth). If Velma asked to take the full £240,000 as an UFPLS, she doesn’t have enough LTA to cover all of this. She’d only receive 25% of her available LTA tax-free (25% of £206,000 = £51,500), then the balance of £188,500 (240,000 – 51,500) would all be taxed at her marginal rate using PAYE as normal.
You’ll find details of the taxation of UFPLS payments in technical centre.
If Velma opted for PCLS and drawdown the same theory applies, i.e. her maximum PCLS would be restricted to 25% of her available LTA at age 75 in the same way.
We’ve covered HMRC pensions rules, however, some providers may have their own business rules or specific product terms & conditions so it’s important to check if they will accept contributions after age 75. Not all providers do.
Contributions for others
Personal contributions paid after age 75 are not entitled to tax relief. However, remember an employer can reduce their corporation tax bill by paying salary or pension contributions. If an over age 75 employee is allowed to set up a salary sacrifice agreement, this could be cost neutral for the employer and would mean a reduction in personal income tax in respect of the amount of salary given up.
Where salary sacrifice is not an option, is there a benefit for your client in making a personal pension contribution? It may be useful to take money out of their estate, to avoid potential inheritance tax (IHT) issues. When a contribution is paid to a pension and the member then dies within the following two years , this needs reported to HMRC on form IHT409. Once this 2 year window is passed, there is no reporting requirement. This 2 year reporting period is shorter than the 7 years which would apply if a potentially exempt transfer was made, eg a 3rd party pension contribution for the member’s children or grandchildren.
The benefit of gifting the money as a 3rd party pension contribution for another is that they benefit from the tax relief based on their relevant earnings, although it then counts towards their annual allowance limit. If the purpose of your client’s pension saving is to build up a fund to be passed on to the next generation, then it may be more tax-efficient instead to gift that generation with the pension contribution. But bear in mind this is then locked in until they reach minimum pension age or satisfy the ill-health criteria for an earlier retirement age, in contrast to a pension death benefit which can pay out to a dependant or nominee from any age. Minimum pension age is currently 55 but is expected to increase to age 57, once the state pension age increases to age 67 are fully completed, in 2028. Once legislated for, this change will impact those born from 1973.
Employer pension contributions and death benefits
In the scenario where Fred returns to work as a mini-bus driver after age 75 and part of his remuneration package is an employer pension contribution, then this should qualify for corporation tax relief as mentioned before. If he has available annual allowance there is no individual tax charge to pay.
If Fred dies before taking any pension benefits from the fund built up with these pension contributions, there is no LTA test. 100% of the death benefits can be passed to his beneficiaries and will be taxed as income against them using PAYE rules as normal. This is the case even where Fred is a business owner/ director of his own Limited company. Just remember the two year rule for reporting pension contributions paid close to death of the pension holder.
Let’s hope that we’ve more to live for than gaining a free TV licence when we reach age 75. Although personally I’d prefer not to have to work, there are individuals who have left pension saving too late and may find this is the most sensible way to maintain their desired standard of living until they can afford to retire.
However, before they continue saving to their pension, it’s important to know your client’s health status, and whether they plan to spend their pension pot or leave it for their beneficiaries to inherit. Once you know your client’s preferred outcome you can work out how best to get them there, meaning Daphne, Velma and Fred won’t need the Mystery Machine to help solve this dilemma!
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