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 2016 a 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.
Retirement and tax
Tax does not disappear once you start the retirement process. While your income is likely to fall when you cease work completely, you will still have an income tax liability if your pension and other incomes exceed your available allowances. In some respects, tax can become more complex in retirement than when you are in work.
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.
Levels and bases of, and reliefs from, taxation are subject to change and their value depends on individual circumstances.
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. This publication represents our understanding of law and HM Revenue & Customs practice as at 31 January 2019.