In his Budget of March 17, 2004 Gordon Brown boldly announced: “I will replace the eight existing tax schemes for pensions with a single lifetime allowance. I will set the allowance at £1.5 million for the first year of the scheme, from April 2006”.

These reforms were labelled as pensions simplification, delivering a single tax regime for pensions and concurrency across both occupational and personal pensions.

In fact, the earlier Sandler report commissioned by the Government had recommended even more radical reforms calling for the number of different variables that the tax system sought to control to be minimised – to limit either contributions to pensions or the benefits paid out, but not both.

The general point being that complication leads to confusion and ultimately acts as a disincentive and is therefore firmly at odds with the overall policy objective of encouraging pension savings.

But when pension simplification was introduced, both controls which Sandler recommended to be avoided in conjunction were exactly what we got.

The Annual Allowance was the mechanism introduced to limit tax relief on contributions to pensions.

Originally set at a lofty level of £215,000, it was then followed by four years of increases of £10,000 before a substantial cut to £50,000 in 2011/12.

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More recently, there has been a greater level of stability with the Annual Allowance level being frozen at £40,000 for nine consecutive tax years until the increase in the last Budget to £60,000 for the current tax year.

Further layers of complexity relating to tax relief limits on contributions under certain circumstances were introduced in 2015 and then 2016 in the form of the Money Purchase Annual Allowance (affecting those who have taken income via flexi-access drawdown or an uncrystallised funds pension lump sum) and the Tapered Annual Allowance (affecting those with high incomes) respectively.

The introduction of the Lifetime Allowance set a maximum value of benefits under a pension scheme, above which penal tax charges would apply on the excess. There were two rates of tax charge, specifically 55% if the excess was taken as a lump sum or 25% if it was drawn as an income. The latter, lower rate reflects the fact that pension income would also be subject to income tax under PAYE.

Like the Annual Allowance, there have been wide variations in the level of the Lifetime Allowance. There were a series of rises following its introduction, before hitting a peak of £1.8 million in 2010/11, and this was followed by a pattern of decreases heading towards a low of £1 million in 2016/17. Three inflationary increases followed before it was frozen at the current level of £1,073,100.

However, as the Lifetime Allowance was reduced, individuals could opt for Lifetime Allowance protection at the previous level, typically having to give up future benefit accrual as a condition. An individual therefore had to weigh up if this was an issue likely to affect them and whether it was in their best interests to take up the protection on offer, subject to the prescribed conditions.

It is also worth noting that the Lifetime Allowance played a role in limiting the amount available as a tax-free cash lump sum, imposing an upper limit of 25% of the individual’s Lifetime Allowance. This is set to continue in the current tax year but the position beyond that is unclear.

Does all this sound simple to you? Whilst each change in isolation has some merit, the consequence over time has been the creation of unnecessary complexity.

The good news is that simplicity is exactly what the Chancellor announced in his Budget on 15 March 2023 by unexpectedly declaring that the Lifetime Allowance would be abolished from April 2024, whilst, in the meantime, Annual Allowance tax charges would not apply.

This is exactly the sort of simplicity that Sandler had called for some two decades ago.

But the fly in the ointment is the Labour party, who are clearly ahead in the opinion polls, have publicly stated that they would reverse the abolition of the Lifetime Allowance, apart from NHS doctors. This is not surprising as they see this as a giveaway to the rich, but no previous UK government has immediately applied retrospective change to pension policy which contradicts actions taken to date.

As things now stand, what we have is a much-needed injection of confidence into the pensions system. These reforms should result in a greater willingness for all people to save for their retirement.

The Government of the day will have their own fiscal objectives, but simplicity is key if the public are to have continued confidence and trust in pensions. The hope is that common sense with prevail, with simplification welcomed at last, and that it is here to stay.

Lee Halpin is head of technical services @sipp