Pension tax simplification


Pension tax simplification, often simply referred to as "pension simplification" and taking effect from A-day on 6 April 2006 was a policy announced in 2004 by the Labour government to rationalise the British tax system as applied to pension schemes. The aim was to reduce the complicated patchwork of legislation built-up by successive administrations which were seen as acting as a barrier to the public when considering retirement planning. The government wanted to encourage retirement provision by simplifying the previous eight tax regimes into one single regime for all individual and occupational pensions.

Main changes

Broadly the new regime allows considerable freedom in the tax relievable contributions that may be made to pension schemes, and the assets in which they may be invested. It also however caps the size of tax favoured pension fund that may be accumulated by an individual. This 'lifetime allowance' was set at £1.6M for 2007–08. Funds accumulated in excess of the lifetime allowance are subject to a tax charge of 55%. Transitional protection provisions were made for individuals who had already accumulated pension funds in excess of this amount.
The annual allowance for each tax year was set at:

2007–2008: £225,000

2008–2009: £235,000

2009–2010: £245,000

2010–2011: £255,000

2011–2012: £50,000

2012–2013: £50,000

2013–2014: £50,000

2014–2020: £40,000
Tax Year - Lifetime Allowance
2006/07 £1,500,000

2007/08 £1,600,000

2008/09 £1,650,000

2009/10 £1,750,000

2010/11 £1,800,000

2011/12 £1,800,000

2012/13 £1,500.000

2013/14 £1,500.000

2014/15 £1,250,000

2015/16 £1,250,000

2016/17 £1,000,000

2017/18 £1,000,000

2018/19 £1,030,000

2019/20 £1,055,000

In addition to the above changes, employees aged 50 or over can withdraw up to 25% of each of their pension funds as a tax–free lump sum when it comes into payment, whether or not they continue to work. The age at which a pension can begin to be paid will be increased to 55 on 6 April 2010.

Member-directed pension schemes

A-Day introduced changes for the two types of member-directed pension schemes, SIPP and SSAS. These two different arrangements were largely brought into line with each other, with the following exceptions: