The taxation of pensions drastically changed in April 2006, opening up both opportunities and potential pitfalls. At the time, HM Revenue and Customs described the process of change as ‘simplification’. While this description was correct initially, a steady flow of Budget revisions since – mainly aimed at increasing revenue for the Exchequer – have recreated a labyrinth of complexity.
Eight years on from the ‘simplification’ tax changes, in the 2014 Budget the Chancellor announced a new wave of pension tax reforms, which have once again changed the pension landscape, largely ending the traditional link between pensions and annuities.
In April 2016a single-tier state pension replaced both the basic state pension and the second state pension, leaving a new structure better suited to integration with another pension reform now being phased in –auto-enrolment in workplace pensions.
The welter of past, present and future changes make this is a good moment to review your pension arrangements and possibly look at alternative methods of retirement provision.
The state pensions system
The introduction of the single-tier state pension in April 2016 is probably the most radical reform ever of state pension provision. If you are planning for retirement, understanding what the state will provide – and when – is an important starting point.
Pensions and tax planning for high earners
Pension contributions qualify for tax relief at your highest rate so are an important component of your planning. Self-invested personal pensions (SIPPs) and small self-administered schemes (SSASs) offer you the opportunity to select your own pension investments, but along with the benefits, there are tax traps to avoid.
Pensions freedom – drawing from your pension
The changes revealed just two years ago in the 2014 Budget were described by some retirement planning experts as a pensions revolution. The radical proposals came as a surprise and were designed to alter the retirement landscape by breaking the link between pensions and annuities.
Workplace pensions and auto-enrolment
Automatic enrolment has ‘changed the UK workplace forever,’ according to the National Association of Pension Funds. The Department for Work and Pensions (DWP) estimates that the new rules ‘could almost double private pension income by the time people now starting work reach their retirement.’ No employer – however small – can afford to ignore these changes.
Levels and bases of, and reliefs from, taxation are subject to change and their value depends on individual circumstances.
The value of investments and income from them can go down as well as up, and you may not get back the original amount invested.
This publication is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The Financial Conduct Authority (FCA) does not regulate tax advice, so it is outside the investment protection rules of the Financial Services and Markets Act and the Financial Services Compensation Scheme. This publication represents our understanding of law and HM Revenue & Customs practice as at 31 October.