Before 6th April, 2006, there was a wide variety of pension regimes. Various governments introduced new legislation to limit the maximum levels of contribution, tax-free lump sum, retirement income, and benefit on death. The tax system was very complicated, because the changes made by new governments were not retrospective, in that, they allowed benefits that were already being built under old rules to continue. The current government on 6th April, 2006, which became known as 'A' Day, introduced one simplified tax regime to govern all previous pension regimes. The reason that underpinned this move was to make the UK tax system a lot simpler and easier to understand, so as to motivate both employers and individuals to save sufficiently towards retirement.

Details of the new tax legislation were provided by Finance Act 2004 and Pensions Act 2004. New Regulations, Acts and Guidelines, have however emerged since these acts attained Royal Assent, namely: Finance Act 2005, Finance Act 2006, Technical Notes and Registered Pension Scheme Manual. Most of these Acts are now in force, but one should be on the look out for changes regarding 'contracting out' and 'alternative secured pensions' at age 75.

Prior to 'A' Day pensions schemes to provide income at retirement and after death were set up by various bodies, such as employers, providers and affinity groups. These bodies can still set up pension schemes, except that now the same tax rules govern all schemes irrespective of how they are put in place. There also used to be essentially 'final salary' schemes and 'money purchase' schemes or a combination of the two. These still exist, but the differences in rules regarding contribution and benefits, depending on whether a scheme was 'final salary' or 'money purchase' have been gotten rid of. There is now no requirement for pension schemes to be set under trust; it is not mandatory to have pensioneer trustees in the scheme, and the scheme does not have to set a normal retirement age.

In order to be subject to the new tax regime, a scheme is supposed to register with HMRC. Pension schemes that were approved prior to 'A' Day are considered to be automatically registered. A scheme that is subject to the new tax regime is said to be a 'registered pension scheme'.

A 'final salary' scheme is set up by employers for the benefit of their employees. They typically provide a pre-defined benefit based on the individual's salary and years of service in the pension scheme.

Money purchase schemes can be set up by an employer for the benefit of its employees or can be for the purposes of individual savings such as Personal Pension or Stakeholder Pension. The benefits that is built in such a scheme is not guaranteed but rather dependent on the accumulation of contributions in the fund, which is further based on the returns from the underlying investments.

A 'hybrid' bears features of both a 'final salary' scheme and a 'money purchase' scheme. The benefit that is paid under such a scheme is the greater of accumulated fund and a pre-determined benefit based on the individual's salary and years of service.

Another kind of scheme that bears resemblance to both 'final salary' and 'money purchase' schemes is the ' cash balance plan'. Part of the benefit under this scheme is dependent on the accumulation of contributions, and is thus not guaranteed. There is however an underlying 'promise' which can take the form of a specific monetary amount to be paid at retirement, or a pre-defined rate on contributions which is not related to the return on the underlying investment. The guarantee can also take the form of a certain percentage of the salary of the member for each year of relevant service. It is the scheme itself that bears the cost of providing the guarantee.

In so far as a pension scheme is 'registered' there are number of tax privileges it can enjoy. Contributions by employers or individuals with attract tax relief; benefit payments will be taxed as PAYE and there will be tax-free cash lump sum payments. The underlying investment will grow free of tax, except for the 10% tax credit on UK dividends which cannot be reclaimed. Also benefits paid on death of the member will not form part of the estate of the deceased as long as it is discretionary. In other words such benefits will not be subject to inheritance tax. It must be noted that some benefits paid at death may be subject to inheritance tax.

All in all, 'A' Day has not only made pension schemes simpler, but has also added several tax privileges; it has augmented the similarity between schemes. Only time will tell, however, whether it will achieve its purpose of enhancing the desire to save towards retirement.