The crazy world of freedom from pensions evolved as John Mather describes. I agree with this as a factual explanation of how we got to where we are now.  – ed (Henry Tapper)

John Mather’s explanation of how we’ve moved away from pensions has authenticity, he was born soon after the war and has a longer memory than most now in their seventies. There are others- I know my readership includes half a dozen!

---

John Mather’s comment on pensions for the wealthy

John Mather

The U.K. pension system generally follows an EET (Exempt, Exempt, Taxed) model: contributions are exempt from tax, investment growth is exempt, but withdrawals (income) are taxed.

The last 30 years have seen this model shift from a relatively “wild west” era of high limits to a highly restrictive regime, and most recently, a significant liberalization under the “Pension Freedoms.”

So while saying invest for the long term is destroyed by the legislation that punishes  the lower liquidity and long term nature of successful infrastructure investment.

Key Changes to the Pension Tax Model (1996–2026)

1. The Pre-A-Day Era (1996–2006)
   Before April 2006, the system was fragmented with different rules for “occupational” vs. “personal” pensions.

• Earnings Caps: Rigid limits on how much of your salary could be considered “pensionable” (often capped around £100,000).

• The Dividend Tax Blow (1997): One of the biggest shifts in the “Exempt” growth phase. Chancellor Gordon Brown abolished the ability for pension funds to reclaim tax credits on UK dividends, effectively removing billions in “exempt” growth value from pension pots over the following decades.

2. “A-Day” Simplification (April 2006)
The government replaced eight different tax regimes with a single unified framework.

• Introduction of the Lifetime Allowance (LTA): A total cap on how much you could save over your life without a 55% tax charge. It started at £1.5 million.
• Introduction of the Annual Allowance (AA): A cap on yearly contributions, initially set at £215,000.
• 25% Tax-Free Lump Sum: Codified the “Exempt” part of the withdrawal phase, allowing 25% of the pot to be taken tax-free.

3. The “Squeeze” Era (2010–2022)
As the government sought to reduce the deficit, the “Exempt” portions of the model were aggressively scaled back.

• Annual Allowance Cuts: The yearly limit was slashed from £255,000 (in 2010) down to £40,000 (by 2014).
• Lifetime Allowance Cuts: The LTA peaked at £1.8 million in 2011 before being cut multiple times down to a low of £1 million in 2016 (later indexed slightly to £1.073m).
• Tapered Annual Allowance (2016): Introduced a “sliding scale” for high earners, reducing their annual tax-free contribution limit to as little as £4,000 if their income exceeded certain thresholds.

4. Pension Freedoms (2015)
This changed the “Taxed” part of the model.
• Removal of Compulsory Annuities: Previously, most people were forced to buy an annuity (taxed income). After 2015, savers could withdraw their whole pot as a “lump sum” (though anything above 25% is taxed at their marginal income tax rate).
• Death Benefits: If you die before 75, your heirs can often inherit the pension tax-free (the ultimate “Exempt” loophole). If you die after 75, they pay their marginal tax rate.

5. The Radical Liberalization (2023–2024)
In a surprise move to keep older professionals (like NHS doctors) in the workforce, the government reversed many “Squeeze” era restrictions.

• Abolition of the Lifetime Allowance (2024): The LTA was completely removed. There is now no limit on how much you can grow your pension pot without a penalty tax.
• Annual Allowance Increase: The yearly contribution limit was raised from £40,000 back up to £60,000.
• Lump Sum Allowance (LSA): While the LTA is gone, the “tax-free” portion was capped at £268,275 (25% of the old LTA), ensuring the “Exempt” withdrawal part doesn’t grow infinitely for the ultra-wealthy.

John concludes (in comments)

My point is a simple one: if the trend is towards being less appealing to the audience required for illiquid investing, add the regulatory requirement for sophisticated HNW qualifications, and more contradictory objectives result.

The goalposts are not just moved but removed. This produces a game with no objectives, just a way to administer the funds so that they can pay invoices.