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.
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.
- Full concurrency – contribute to personal and occupational schemes at the same time
- Single tax regime – one set of tax rules
- Lifetime allowance – Amount of pension over which charges may be levied if you have no protection
- Annual allowance – obtain tax relief on contributions of up to £3,600 or 100% of income, if greater, subject to a maximum
- 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 annual allowance for each tax year was set at:
Tax Year - Lifetime Allowance
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.
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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:
- SIPP would still be managed by an administrator;
- SSAS no longer requires a pensioneer trustee;
- SSAS continues to be able to offer loans to a sponsoring employer, although such "loanbacks" must now be secured against an asset of the borrower.
- Taxation in the United Kingdom
- UK labour law
- UK pensions
- Personal pensions
- Self-invested personal pensions
- Small Self Administered Schemes
- Association of Member-Directed Pension Schemes (AMPS) - The principal body for discussing changes involving Member-Directed Pension Schemes.