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Mastering Your Pension Strategy: Recent Changes and Key Differences Between SIPPs and SSAS

October 16, 2023

Pensions are a vital component of your financial future. They provide a safety net for retirement, ensuring you have enough funds to maintain your quality of life when you stop working. However, pensions are not static; they evolve and adapt to changes in the economic landscape and government policies. In this article, we’ll explore the recent changes in annual allowances and the Lifetime Allowance and how this impacts your pension.

Recent Changes in Annual Allowance

In the Budget announced on March 15, 2023, the UK Government introduced several noteworthy changes related to pensions. Some of these changes took effect immediately, on April 6, 2023, while others are set to be implemented in the 2024/25 tax year. Let’s break down the key updates:

Immediate Changes (From April 6, 2023):

Annual Allowance: The annual allowance, which represents the maximum amount you can contribute to your pension each year while still receiving tax benefits (as long as your earnings are above this), increased from £40,000 to £60,000.

Money Purchase Annual Allowance: The money purchase annual allowance, relevant for those who have already accessed their pension savings and are thinking of making further pension contributions, rose from £4,000 to £10,000.

Tapered Annual Allowance: The adjusted income threshold for the tapered annual allowance increased from £240,000 to £260,000. This means that UK taxpayers are now entitled to a full annual allowance until they are making £260,000 annually through earnings, at which point it is tapered down gradually.

Lifetime Allowance Charge: There will be no lifetime allowance charge in the tax year 2023/24. This previously capped pension holdings to £1,073,100 before further contributions or withdrawals were subject to tax charges.

Taxation Changes: Taxation of certain lump sums, for example any pension contributions above the Lifetime allowance, shifted from a flat 55% tax rate to individual marginal rates of income tax.

Protection Cessation: Individuals who applied for enhanced protection or fixed protection in 2012, 2014, or 2016 before March 15, 2023, can maintain their protection status.

Unchanged for 2023/24:

All existing rules for calculating tax-free cash remain the same.

Lifetime allowance checks are still required at benefit crystallisation events until the 2024/25 tax year.

Anticipated Changes from Tax Year 2024/25:

Draft legislation released on July 18, 2023, provides insights into changes expected in the 2024/25 tax year:

Lump Sum Allowance: Within this overall limit, a tax-free limit for various lump sums will exist, called the ‘lump sum allowance,’ set at £268,275 or any higher protected amount.

Lump Sums Subject to Testing: This includes pension commencement lump sums, uncrystallized funds pension lump sums, trivial commutation lump sums, winding-up lump sums, and various death benefits.

Protection Deadline: A deadline of April 6, 2025, is proposed for those applying for fixed protection 2016 or individual protection 2016.

It’s important to note that these proposed changes are still under consultation and may evolve further.

SIPP vs. SSAS: Understanding the Differences

Now that we’ve explored recent pension changes, let’s delve into the differences between Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSAS).

SSAS:

Greater Investment Flexibility and Control: SSAS offers more control over investment decisions, particularly for those who want to use their pensions to invest in their businesses. Each member of an SSAS is usually a trustee. You can also use SSAS to provide loans and financing to your business at favourable rates, and the repayment of this loan goes straight into your pension along with the interest. The repayment is also a tax-deductible expense for the business.

Limited Availability: SSAS is typically available to company directors.

SIPP:

Open to Anyone: SIPPs are open to anyone who meets the provider’s eligibility requirements, usually based on a minimum fund size.

Personal Pension: SIPPs are personal pension plans. The SIPP provider acts as the trustee. Having the provider act as a trustee means far less administration for the pension holder- SSAS holders have to report changes/events to HMRC or pay a provider for this, meaning far greater costs.

While both SIPPs and SSAS are regulated similarly, there are key differences in governance and eligibility. SSAS often involves a higher degree of involvement in scheme administration, making it suitable for those who want more control over their pension investments, especially in the context of their businesses.

Pensions are a critical part of your financial future, and staying informed about recent changes and understanding the differences between pension schemes can help you make well-informed decisions about your retirement savings.

Be sure to consult with our financial advisors to tailor your pension strategy to your specific needs and goals. Get in touch with them here.

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