Just over 10 years ago, Gordon Brown, then chancellor of the exchequer, said he was “setting out proposals for a radical simplification of the tax rules for pensions… replacing them with a single lifetime limit on the amount of pension saving that can benefit from tax relief”. Writing in the foreword to a green paper, he added that his proposals would enable people to make “clear and confident decisions about pension saving”, allowing “greater individual choice and flexibility” about when and how much to save in a pension and reducing administrative burdens on employers and providers.
Historically, pensions saving has benefited from significant tax advantages. These tax breaks are primarily an incentive to ensure as many people as possible save for their retirement, reducing those who would be dependent on state benefits in their old age. But in tough economic times, there is no question of increasing the tax benefits for pension arrangements; in fact, successive governments have looked at ways to reduce the tax incentives available to pensions savers while trying not to destroy the concept of independent provision.
In practice this has led to multiple changes – each reducing the sum that can be saved and the amount of pension that can be granted in a tax-beneficial manner – and never really established the stable environment envisioned by Mr Brown. What has happened to the main pillars of the 2006 simplification regime?
Lifetime allowance
Successive changes over the years have affected all forms of pensions, and the small self-administered scheme (SSAS) is no exception. For higher earners who have sizeable pensions, alterations in the lifetime allowance are more likely to make an impact.
The initial lifetime allowance set in 2006 was £1.5m, with a proposed stepped increase to £1.8m during a five-year period. This was broadly equivalent to a maximum pension under prevailing occupational pension rules for a man of 60 drawing an indexed pension and providing a surviving spouse’s pension. Allowing for the then-appropriate salary cap, this was effectively a pension of £70,000 pa.
