How to plan your finances as you approach 75

Once upon a time, not so long ago, the idea of a lengthy retirement spanning decades rather than years was a rarity.

A century ago in 1921, both men and women were likely to die before age 60. Even by 1951, after the universal contributory state pension had been introduced in 1946 for men aged 65 and women aged 60, men could expect to live for less than two years after retirement, according to ONS data. Women soldiered on for another five years or so – but it’s a fair guess that in most cases complex retirement planning was not on the agenda.

How times have changed. Since then, medical improvements have altered the retirement landscape significantly. Men who reach age 65 can expect to live a further 18.3 years on average, while women are looking at almost 21 years more.

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Importantly, a long retirement does not necessarily equate to a healthy, active one. The ONS also produces interesting data on “healthy life expectancy”, which shows that the average healthy life for both men and women born between 2018 and 2020 (not those at retirement age) is around 63 years.

Those statistics on health make somewhat depressing reading for anyone in their 60s, although “good health” no doubt means different things to different people.

Nonetheless, the fact remains that retirement looks very different these days – and that those potential decades of non-earning life require careful financial planning for a comfortable existence.

Many people take financial advice around the time they retire to get their pensions in order, set up income drawdown and ensure everything is as tax efficient as possible.

But quite a lot may have changed 10 or 15 years down the road, at age 75. You may be absolutely fine and still very active; or you (or your partner) may be less mobile or have a medical condition that has shifted the focus of your life to some extent.

At the same time, 75 is a significant age in regulatory terms. You can no longer get tax relief on personal pension contributions, for instance, and the rules around inheritance also change.

All in all, it’s a sensible time to examine your financial affairs and consider any changes you want to make. So, what should you think about?

1) Consider de-risking your portfolio

If pensions and individual savings accounts (ISA) form a significant part of your retirement income, then you may well want to think about de-risking them to some extent, says Ian Cook, a chartered financial planner at Quilter Cheviot.

“At this stage, preserving capital becomes more important than seeking high returns that will grow the pot, especially if it is sufficient to support your desired lifestyle,” he explains.

A further attraction is that by simplifying your portfolio you may be able to reduce complexity and fees, making your own life easier if you continue to manage it. Some investors may feel less inclined to take an active role at that age, in which case this could be a time to hand over to an adviser.

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It’s a particularly attractive proposition when macro-economic conditions are challenging. Indeed, according to recent research among financial advisers from insurer Aegon, more than half (53%) of those surveyed reported that some or most of their retired clients wanted to decrease risk in their portfolios in response to the macro difficulties of the past two years.

2) Get tax efficient

Until age 75, if you’re still working and haven’t withdrawn income from a defined contribution (DC) pension, you can continue to pay up to £60,000 or 100% of your salary (whichever is less) into your pension each tax year.

If you are drawing income flexibly from your pension and still working, then the cap reduces to £10,000. But even fully retired people can put up to £2,880 a year (which the government tops up to £3,600) into a pension.

However, all pension tax relief stops at age 75, which means the focus needs to switch to other tax shelters. Says Cook: “Options such as ISAs or an insurance bond might offer tax-efficient growth and income possibilities without the restrictions associated with pension contributions beyond this age.”

Carla Morris, financial planner at RBC Brewin Dolphin, suggests another possibility, if it's affordable: “Consider redirecting pension contributions to younger family members, for instance as JISA or pension contributions; if you pay into a pension in their name, non-earning grandchildren will get tax relief of 20% on your contributions up to £2,880 net a year.”

3) Understand pension rules

There are changes in the pipeline around the way pension death benefits are taxed, due to take effect from April this year. At one point it looked as though all beneficiaries would have to pay income tax on inherited pensions, regardless of the pension holder’s age – but that is not the case, says Morris.

It’s complex and confusing, she adds, but under the new rules, “if you die before age 75, your personal pension can be paid to beneficiaries tax-free, as long as the fund is worth less than the new Lump Sum and Death Benefit Allowance (LS&DBA), which replaces the Lifetime Allowance from April.” If you die after age 75, beneficiaries will be taxed at their marginal rate of income tax when they make pension withdrawals, as is the case now.  

Importantly, there will no longer be a maximum age at which you can draw your 25% tax-free cash (at present it must be taken by age 75). But if you die after age 75 and haven't drawn your tax-free cash, it will not be available to your beneficiaries (as it is now), so a valuable pension benefit is effectively lost altogether.  

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However, cautions Morris, there may not be much advantage to pension holders taking the tax-free cash without a specific purpose in mind: “Consider carefully what you will do with it, as you will be withdrawing it from a pot that grows free of income and capital gains tax (CGT) and is outside your estate for inheritance tax (IHT) purposes.”

4)  Plan your estate effectively

You may have enough income and assets to support your lifestyle now and looking ahead, in which case this could be a good time to think about making lifetime gifts to family with a view to reducing any eventual inheritance tax bill on your estate.

Your health at this stage may influence the type of gifts you make, says Morris. “You have your annual £3,000 allowance, which is immediately exempt for IHT, but larger gifts could start a seven-year clock ticking before they fall entirely outside your estate.”

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Gifts out of surplus income can be a particularly useful allowance if you have spare pension income you can pass on regularly, as there is no cap on the amount you gift; but you do need to keep careful records.

“Age 75 could also be a good time to update your will, which really should have been in place for a while at this stage,” Morris adds.

5) Think about annuities

With an annuity you trade some or all your pension savings for a guaranteed income for life. The amount of annuity income your pension will buy is heavily influenced by life expectancy: as you get older the annuity rate rises.

Thus in ball-park terms, someone aged 65 and in good health with £100,000 of pension income (after taking the 25% tax-free lump sum) could expect to buy an annuity worth around £6,000 a year, according to Legal & General’s annuity calculator. At age 75, that sum rises to around £7,500.

Moreover, by age 75 you are more likely to have a medical condition that means you qualify for an enhanced annuity paying a higher rate.

But you need to shop around: research by Just Group found the gap between best- and worst-paying annuities widens markedly with age. A healthy 75-year-old can secure about 17% more income from the best annuity provider compared to the worst, the retirement specialist finds. The equivalent gap for a 65-year-old is 11%.

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So it’s a complicated area, given other considerations to take into account such as index-linking and provision for your spouse or partner, and expert help is a sensible idea. With annuities you lose access to your capital, and you can’t leave anything to younger generations on death, so think carefully before you buy.

6) Social care planning

Ideally, says Cook, planning for potential care needs should begin well before reaching 75, given the costs involved. If you haven’t done anything about it, however, he advises that “starting to set aside funds or considering insurance options that cover care costs would be a wise move at this age”.