Pension simplification

In 2004 the Labour government announced plans to rationalise the British tax system as applied to pension schemes; these changes are referred to as pension simplification.

The new single tax regime were "adopted" on 6th April 2006; this date is referred to as 'A'-day.


The aim is to reduce the complicated patchwork of legislation built-up by successive administrations which act as a barrier to the public when considering retirement planning. Ultimately the government wishes 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 will allow 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' has been set at £1.6M for 2007-08. Funds accumulated in excess of the lifetime allowance may be subject to a tax charge of 55%. Transitional protection provisions have been made for individuals who may already have accumulated pension funds in excess of this amount.

* Full concurrency - contribute to personal and occupational schemes at the same time
* Single tax regime - one set of tax rules
* Lifetime allowance - £1.6 million as of 2007-08 tax year
* Annual allowance - obtain tax relief on contributions of up to £3,600 or 100% of income, if greater, subject to a maximum £225,000 per year as of 2007-08
* Alternative secured pensions - possible to avoid purchasing an annuity even after age 75
* Single allowable investment regime - all schemes allowed to hold qualifying investments

The maximum that can be contributed in any year will rise as follows:
2007-2008: £225,000
2008-2009: £235,000
2009-2010: £245,000
2010-2011: £255,000

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 increase to 55 on 6 April 2010.

External links

* [ HMRC Pensions Tax Simplification pages]
* [ Association of Member-Directed Pension Schemes (AMPS)] - The principal body for discussing changes involved in the area of pension planning.

ee also

* Personal pensions
* Self-invested personal pensions

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