10 years since pension simplification – did it work?

On the tenth anniversary of A-Day, Andy Bell, chief executive of AJ Bell, takes a look back at seven statements he made in his summary of Pension Tax Simplification in 2006 to see how they look a decade down the line.

  1. Simplification – success or failure?

A natural comment on which to start, and one that pretty much speaks for itself:

“My publicly stated desire has long been that the new rules provide a simple, stable and robust legislative framework for pension schemes which will last a generation or more. The true test of how successful these new rules are will be judged against the number of changes required after A-day.”

There hasn’t been an Autumn Statement, Budget, or Finance Act since 2006 (in fact 2004) where pensions haven’t appeared front and centre. We have had a labour, coalition and conservative government in the time under consideration so this is not a party political statement. The power to play God with the retirement savings of this and future generations should be wrested off politicians and handed to an independent commission that can see the benefits of playing the long game.

  1. Combining defined benefits and money purchase pensions

The following is ten years old but could have been taken from our response to the Government’s recent pensions tax relief consultation.

“Trying to deal with defined benefits and money purchase schemes in one set of rules has predictably resulted in the legislation being overly complex. I also believe that to limit the benefits from a money purchase scheme, rather than the contribution input, is flawed and again leads to unnecessary complexity.”

Just in case someone from the Treasury is reading – let’s limit tax relief on defined contribution schemes by the level of contribution, and limit the tax relief on defined benefit schemes by the level of benefits.

  1. A light touch annual allowance!

Some of you may remember that the annual allowance was originally conceived as a “light touch” supplement to the lifetime allowance.

“This [the lifetime allowance] is to be supplemented by the annual allowance which is a light touch compliance tool designed to limit the tax relief available on contributions.”

With the annual allowance now sitting at less than 20% of its 2006 level, and with a money purchase annual allowance and tapered annual allowance to complicate matters, times have certainly changed! The annual allowance is now the Government’s blunt instrument of choice when it comes to controlling the cost of pensions.

  1. Abolition of annuity purchase – version one...and remember the Plymouth Brethren?

According to the Chancellor, compulsory annuity purchase was abolished in April 2015. An argument could also be made for its abolition being April 2011, but rarely is it acknowledged that the true end date for compulsory annuitisation was A-Day, back in 2006.

“I believe that the abolition of compulsory annuity purchase is of equal, if not greater, significance. I have no doubt that an indefinite extension of the income withdrawal rules beyond age 75 would have been a far simpler solution to the religious objections to mortality pooling raised by the Christian Brethren.”

One of the areas we have campaigned hardest was in the welcome extension of income withdrawal past age 75 and, at the same time, the scrapping of the 82% tax on lump sum death benefits that could apply from that age.

  1. Pensions used to provide a pension – a novel idea!

Pensions simplification was supposedly underpinned by the principle that pension schemes must be used to provide pensions.

“The government argues that pension schemes should be used to provide a pension. They are also insistent that pension schemes must not be used to create a legacy for the next generation. Well, I have my doubts that the new regime will help underpin these principles.”

In the new world of pension freedoms that now seems a slightly dated concept and pensions can very easily by used as a means to pass wealth through the generations.

  1. Quinquennial reviews, to triennial reviews, to no reviews at all

At A-Day I was unconvinced that five yearly reviews of maximum income would last long.

“Five years is a long time to go without reviewing the maximum income, particularly if assets are increasing during the period and the member is seeking to maximise income.”

Another campaigning success and they were replaced by three yearly reviews in 2011 and, save for those still in capped drawdown, reviews become completely obsolete under current rules.

  1. One on which I could have gambled the house

Long before Gordon Brown’s infamous u-turn on residential property in SIPPs and SSASs I was arguing that it was an accident waiting to happen.

“My personal view on property investment, putting my trustee and administrator’s hat on, is that commercial property is fine, genuine 3rd party buy to let is acceptable if not administratively cumbersome, but the notion of owning one’s main residence or holiday home in the pension fund is madness. Stepping back from this rather altruistic standpoint, the SIPP and SSAS industry will benefit greatly from this new area of investment flexibility.”

The option to invest in residential property may have disappeared, but SIPPs undoubtedly received a huge boost from the surrounding publicity. Probably the most significant (non-) event in history of SIPPs. For the first time, SIPPs were the focus of significant attention in the national press and the possibility of self-investment within pensions came to the attention of a much wider audience.

In conclusion, A-Day introduced a legislative framework that was more coherent and easier to understand than its predecessor. The Government didn’t go far enough in pursuing the stated objectives and my thinking then is broadly the same as my thinking now. Pensions simplification was a great starting point from which to go on and truly simplify pensions. Sadly, the direction of travel in the last ten years has been in the opposite direction.


Andy co-founded AJ Bell in 1995, having spent a number of years working within the financial services sector. Graduating from Nottingham University in 1987 with a first class degree in Mathematics, he qualified as a Fellow of the Institute of Actuaries in 1993 and has built AJ Bell into one of the UK’s largest investment platforms.