Understanding SSAS and SIPP Pensions: What’s the Difference?

When it comes to taking control of your pension, two popular options are SSAS and SIPP. Both are types of pensions that let you choose how to invest your money, but they have important differences:

1. SSAS (Small Self-Administered Scheme):

• Best for: Business owners who want more control and flexibility.

• Features:

• Can have multiple members, such as family or business partners.

• Offers significant flexibility in investments (e.g., commercial property or loans back to your own business).

• Trustees manage the scheme collectively.

• Downside: It’s more expensive to set up and run due to admin and regulatory costs.

2. SIPP (Self-Invested Personal Pension):

• Best for: Individuals who want control over their pension investments.

• Features:

• Typically set up for one person.

• Simpler to manage and costs less than a SSAS.

• Offers a wide range of investments (e.g., stocks, funds, or property).

• Downside: Less flexible for business-related investments compared to SSAS.

Why Would You Use a SSAS?

A SSAS can be worth the cost if you:

• Run a business and want to use pension funds to invest in it (e.g., buying business premises or lending money to the company).

• Have a group of people (family or partners) who want to pool pensions into one scheme.

Pensions for Employees: Tax Relief Simplified

If you’re employed, your pension contributions get tax relief in one of two ways:

1. Relief at Source:

• You pay into your pension after tax, but your pension provider claims back basic rate tax from HMRC.

• If you’re a higher-rate taxpayer, you can claim the extra relief on your self-assessment tax return.

2. Net Pay Arrangement:

• Contributions come directly from your salary before tax is calculated.

• This is automatic and ideal for higher-rate taxpayers because all tax relief is applied immediately.

How to Tell Which System You’re Using: Check your payslip or ask your employer! If contributions are taken from your gross salary, you’re on a net pay arrangement.

Is a Self-Administered Scheme Right for You?

IFAs (Independent Financial Advisers) often suggest switching to a self-administered pension when your pension pot reaches around £200,000. Why?

• At this level, the cost of managing a SSAS or SIPP becomes worth it for the flexibility and investment options.

Final Thoughts

Both SSAS and SIPP give you greater control over your retirement savings, but they suit different needs. SSAS is excellent for entrepreneurs who want to integrate their pension with their business, while SIPP is more tailored to individual investors seeking simplicity.

Tax reliefs, employer contributions, and investment opportunities make pensions one of the most tax-efficient ways to save for retirement.

As a final thought we look at the budget in October 2024 and see that from 2027 Pensions will be subject to inheritance tax. My view is that now Pensions will be used for what they were meant to be used for, i.e. providing an incoming retirement as opposed to an inheritance tax saving a vehicle.

by Jay Cholewinski

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