Finance Act 1986: A Look at Schedule 20 (Personal Pension Schemes)

The Finance Act 1986 brought about significant changes to the UK pension landscape, and Schedule 20 specifically addressed the establishment and regulation of personal pension schemes. This schedule introduced a framework enabling individuals, particularly those not covered by employer-sponsored pension schemes, to contribute to tax-advantaged personal pension plans.

Prior to the Act, occupational pension schemes were the dominant form of retirement savings. Schedule 20 aimed to broaden pension coverage by creating a more accessible and flexible option. This was particularly important for self-employed individuals, those in non-pensionable employment, and employees seeking to supplement their existing company pension benefits.

A key aspect of Schedule 20 was the tax relief provided on contributions to personal pension schemes. Individuals could contribute up to a certain percentage of their earnings and receive income tax relief at their marginal rate. This incentivized saving for retirement and reduced the immediate tax burden. The maximum allowable contribution percentage varied based on age, with older individuals generally allowed to contribute a higher percentage of their earnings. The relief was granted on the gross contribution, effectively meaning the government contributed a portion through reduced tax liabilities.

The schedule also outlined the rules governing the management and operation of personal pension schemes. It specified the types of investments that were permissible within the scheme, ensuring a level of security and diversification. Furthermore, it established regulations around the provision of information to scheme members, requiring providers to disclose details about charges, investment performance, and projected retirement benefits. This aimed to increase transparency and empower individuals to make informed decisions about their retirement savings.

Schedule 20 outlined the allowable benefits from personal pension schemes. Typically, benefits would be taken as a pension income during retirement. Tax-free lump sums were permitted within certain limits, allowing individuals to access a portion of their savings without immediate taxation. The schedule also specified the conditions under which benefits could be drawn, typically after a specified minimum retirement age.

Amendments and updates have been made to the original provisions of Schedule 20 over the years, reflecting changes in pension policy and market conditions. These changes addressed issues such as contribution limits, benefit structures, and the regulatory environment surrounding personal pensions. Despite these subsequent amendments, Schedule 20 of the Finance Act 1986 remains a foundational piece of legislation that significantly impacted the development of personal pensions in the UK, paving the way for a more inclusive and flexible retirement savings system.