Pension tax simplification, often simply referred to as "pension simplification" and taking effect from A-day in 6 April 2006 was a policy announced in 2004 by the Labour

Labour Party (UK)

The Labour Party is a centre-left democratic socialist party in the United Kingdom. It surpassed the Liberal Party in general elections during the early 1920s, forming minority governments under Ramsay MacDonald in 1924 and 1929-1931. The party was in a wartime coalition from 1940 to 1945, after...

 government

Government

Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

 to rationalise the British

United Kingdom

The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

 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.

• 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 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

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

Self-invested personal pension

A Self-Invested Personal Pension is the name given to the type of UK-government-approved personal pension scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue & Customs ....

 and SSAS

Small Self Administered Scheme

Small Self Administered Scheme is a type of UK Occupational Pension Scheme.Schemes are trust-based and established individually, usually by directors of limited companies for specified employees of the company. Since Pension Simplification , SSAS has been available for establishment by those who...

. 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.

See also

• Taxation in the United Kingdom
  Taxation in the United Kingdom
  Taxation in the United Kingdom may involve payments to a minimum of two different levels of government: The central government and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty...
  
  
• UK labour law
• UK pensions
• Personal pensions
• Self-invested personal pension
  Self-invested personal pension
  A Self-Invested Personal Pension is the name given to the type of UK-government-approved personal pension scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue & Customs ....
  
  s
• Small Self Administered Scheme
  Small Self Administered Scheme
  Small Self Administered Scheme is a type of UK Occupational Pension Scheme.Schemes are trust-based and established individually, usually by directors of limited companies for specified employees of the company. Since Pension Simplification , SSAS has been available for establishment by those who...
  
  s

External links

• Association of Member-Directed Pension Schemes (AMPS) - The principal body for discussing changes involving Member-Directed Pension Schemes.