PSI4.12 - Introduction: Historical Review of Revenue Legislation - Finance (No2) Act 1987

(This archived guidance relates to HMRC discretionary practice before the 6th April 2006. For current guidance on Registered Pension Schemes see the Registered Pension Schemes Manual)

The Finance (No2) Act 1987 introduced a major tax reform package for pensions. The major changes were:

1. new style personal pensions to replace retirement annuity contracts;
2. arrangements for members of occupational pensions to have the right to pay free-standing additional voluntary contributions to a separate pension plan of their choice (an FSAVCS);
3. improved transferability of pension rights,and
4. the scope for manipulating tax reliefs (especially to exclude income from share option gains as described in PSI 4.10), particularly by very high earners, was curbed. This was achieved by tightening up the definition of final remuneration to prevent unacceptable inflation of the figure on which benefits were based, placing a limit of £150,000 on the tax free lump sum and requiring the maximum pension to accrue over a longer period than previously (20 years instead of 10). Linked to this last change was an additional restriction that faster accrual ("uplift") of lump sum retirement benefits was possible only to the same extent that pension benefits were uplifted. (Previously it was possible to give a fully uplifted lump sum even though no uplifted pension was being provided.)