The taxation of pensions drastically changed in 2006, opening up both opportunities and potential pitfalls. At the time, HM Revenue & Customs described the process of change as ‘simplification’. In many respects, this description was correct. For most people, the new tax rules did simplify the situation very considerably. The multiplicity of different tax regimes was abolished with effect from 6 April 2006 and initially very few people found the replacement tax regime’s allowances for contributions or retirement benefits in the least restricting. However, amendments to the pension contribution tax relief rules introduced from 22 April 2009 and further tax reforms implemented from April 2011 have changed the picture: simplicity is no longer the watchword.
Pensions remain the most tax-efficient way for most people to provide for their retirement. The shrinking minority of the working population who are still members of defined benefits (or salary-related) pension schemes will have a generally attractive and secure means of building pension benefits. Most of the remainder who depend on defined contribution (or money purchase) schemes will find that the tax advantages normally outweigh the restrictions on access and the other rules. If you are a business owner, your pension scheme could be a useful tax vehicle for achieving your financial objectives.
The recent and proposed changes could mean that this is a good moment to review your pension arrangements and possibly look at alternative methods of retirement provision.