What did A-Day achieve?

It was thought removing some of the inflexible and complicated rules would eliminate a barrier to pension saving.

There were, before April 2006, eight different regimes, and “people did not know what they could and could not do”, says Ian Price, divisional director for pensions and consultancy for St James’s Place. “There were different regimes relating to your tax status and trying to remember all the regulations was difficult.

“The concept of simplifying everything into one regime, with clarity over what could and could not be done, was a good move for everyone.”

Complexity

Mark Stopard, head of product development for Partnership, calls the pre-A-Day world “a complex patchwork of legislation and aspects of eight different tax regimes”.

There were restrictions on how much you could pay into a personal pension as a percentage of earnings, with lower limits than occupational pensions.

With occupational pensions, there were limits on how much you could get out, based on salary and service.

Ian Naismith, pensions expert for Scottish Widows, explains: “There was a clear split between occupational pensions (known as chapter one and chapter four schemes, based on the relevant section of the Income and Corporation Taxes Act 1988).

“All schemes had to be approved by the then Inland Revenue (HMRC), which published practice notes IR12 for occupational and IR76 for personal pensions, explaining how it would exercise its discretion.”

At A-Day, Mr Naismith says this element of discretion “largely disappeared”, with HMRC insisting it now just applies the law.

Since 2006 we have had a series of sticking-plasters to deal with short-term political wins by each government Neil MacGillivray

To attempt more harmonisation and encourage more people to make provision for later on in life, the government attempted to meld these regimes into one, creating concepts such as the annual allowance and lifetime allowance.

For Neil MacGillivray, head of technical support for James Hay, this was a boon: “A-Day achieved clarity – an annual allowance stipulating how much you could save each year and a lifetime allowance capping your total pension savings.”

Mr Stopard adds: “The government also unveiled the concept of the alternatively secured pension, which meant people did not have to annuitise, but could use a form of drawdown.”

A further change was to do away with the limit on the amount of death benefits, although a 55 per cent tax charge would be applied if the pension was paid out as a lump sum on the death of the member.

Taxing questions

Yet while the idea of an lifetime allowance (LTA), an annual allowance (AA), 25 per cent tax-free lump sum and one single, expanded, all-encompassing investment regime seemed good, the reality was different.

“Pension simplification has proved to be the biggest oxymoron ever”, says Mr Price. “We’ve seen more changes than ever to pensions over the past decade.”

Mike Morrison, head of platform technical for AJ Bell, explains: “Gordon Brown famously did a U-turn on esoteric investments [disallowing many of these within self-invested personal pensions].

“The idea of an LTA alongside an AA was scrutinised. Falling annuity rates mean the LTA was always losing purchasing power, while the LTA under defined benefit schemes maintained a 20 times multiple, so DB schemes still appeared to have specific advantages.”

When the LTA and AA were frozen in subsequent Budgets – or even cut – problems arose, he adds.

Constant tinkering

While the “intention was honourable, the reality has been different”, Mr MacGillivray adds. “Pension simplification was meant to be a wholesale change to the way pensions were legislated, from the ground up.

“Yet since 2006 we have had a series of sticking-plasters to deal with short-term political wins by each government.”

Kate Smith, head of pensions at Aegon, believes the rot set in in 2011: “By then the government started to unravel the generous pension tax breaks.

“We now have seven protections against the LTA tax charges, on top of other age and tax-free cash protections. Arguably, the pensions tax regime is more complicated than ever.”

Simplification would never have been easy to implement. According to Mr Naismith: “It was never going to bring this quickly because of transition arrangements.

“But what started as a laudable attempt to make pensions more easily understandable and effectively to remove limits for almost everyone got bogged down by measures to prevent abuse.

“Later, falls in the LTA and changes to the annual allowance brought new complications. The term ‘simplification’ was seen as a bit of a joke from the start, and isn’t even funny now.”

Mr Morrison adds: “Pension tax relief is like a drug they can’t seem to leave alone.”

Some success

So did it achieve anything? Mr Price believes so. He says: “I believe pensions is cleaner, more transparent and better regulated. We have better projection rates and clearer actuarial assumptions.”

Mr Stopard says: “It succeeded in creating one tax regime for pension accumulation and setting clear boundaries. It condensed a great deal of confusing legislation into a more cohesive approach to pensions.”

The term ‘simplification’ was seen as a bit of a joke from the start, and isn’t even funny now Ian Naismith

Furthermore, Peter Bradshaw, national account director for Selectapension, claims A-Day particularly helped the “wealthy”, who could benefit from greater allowances and afford to put larger amounts into pensions.

He adds: “It also created a market for pensions drawdown and theoretically freed savers from having to buy an annuity at retirement.”

According to Ms Smith, the addition of retirement options was certainly a “positive change”. “It was no longer compulsory to buy an annuity at 75. Instead people could buy an Alternatively Secured Pension, and the annuity and income drawdown rules gave people more flexibility and choice.”

And people started thinking more about their pension planning, Mr Price adds: “I believe A-Day got pensions back onto the agenda, and made people think more about planning for retirement.”