Pensions Tax Simplification

United Kingdom

In the Budget, the Chancellor confirmed the Government's commitment to proceed with the simplification of the tax regime for occupational pensions.

The key points are set out below and the main differences from the Revenue's December 2003 paper are in bold.

  • The new regime will be implemented in April 2006.
  • The lifetime allowance will be £1.5 million in 2006; £1.6m in 2007; £1.65m in 2007; 1.75m in 2009; and 1.8m in 2010. The level of the allowance will be reviewed every 5 years.
  • The annual allowance will initially be set at £215,000 and will increase each year (rising to £255,000 by 2010) and the level will be reviewed every 5 years.
  • Schemes will be able to pay tax-free lump sums of up to 25% of the capital value of the pension, subject to a maximum of 25% of the lifetime allowance.
  • A 25% charge will be levied on funds in excess of the lifetime allowance. Funds over the lifetime allowance may be taken as a lump sum, in which case the charge will be at a rate of 55%.
  • A charge of 40% will be made on contributions or increases above the annual allowance.
  • A valuation factor of 20:1 will be used to value defined benefits for the purpose of the lifetime allowance and a factor of 10:1 to value the annual increase for the purpose of the annual allowance.
  • Transitional arrangements will protect pension rights built up before 6 April 2006. There will be two options for transitional protection from the lifetime allowance charge.
  • The minimum pension age will rise from 50 to 55 by 2010. Those with certain existing contractual rights to draw a pension earlier may have that right protected.
  • Members may, where the rules allow, continue working for the same employer whilst drawing retirement benefits.
  • Pensions will still need to be secured by age 75.

The Government's stated intention is that these reforms will "bring simplification and increased flexibility that will ensure a transparent, consistent and flexible system that is readily understood, making it easier for people to concentrate on deciding when and how much to save for retirement".

More details of the Budget can be found here.

For further information please contact Mark Atkinson at [email protected] or on +44 (0) 207 367 2184