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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.