How Your SIPP Could Suffer In The Budget

How Your SIPP Could Suffer In The Budget
Underwater by Andy Deitsch Why?

With just over two weeks to go until the Budget, and UK PLC badly needing increased tax receipts, speculation is rife in SIPP and SSAS world as to what detrimental changes might be introduced.

As There Are Several Ways Your SIPP Or SSAS Could Come Under Attack In The Budget, Check It Out Now To Avoid Losing Out

The Chancellor Has Plenty Of Tax Raising Opportunities In Pensions

Earlier this month, Theresa May announced the end of austerity, pledging more money for the NHS.  Coupled with the uncertainties surrounding the cost of Brexit and the ramifications of Universal Credit, Philip Hammond is likely to find balancing the Budget somewhat challenging.

It’s therefore no surprise that pensions, including SIPP and SSAS, with all their associated tax privileges, are likely to be firmly in the spotlight.

Many experts are suggesting that higher rate tax relief on pension contributions is an obvious target.

This may come under fire in one of two ways. 


1. Changes to the Annual Allowance


2. A reduction in the level of tax relief, perhaps to a flat rate of somewhere between 25 per cent and 30 per cent.


This would be good news for those who pay basic rate tax.  It would represent an increased tax break from the current rate of 20 per cent, perhaps encouraging people to save more, reducing the potential long term burden on the State.

There Are Many Pension Anomalies

Here’s one relating to tax relief that's currently affecting more than one million earners.

Another relates to how you draw tax free cash.

It’s relevant if you have a fully flexible SIPP or SSAS that has access to all of the options to draw money from your pension.

Here are two of the options:


1. Cash Payment

Snappily referred to as an Uncrystallised Funds Pension Lump Sum, you can draw some or all of your pension as a cash payment.  The first 25 per cent is tax free.  The remainder is treated as income.  It’s added to your other income and taxed at your marginal rate. 

Since pension freedoms came into force in 2015, billions have been withdrawn from pension funds using this option, producing tax revenues for a welcoming Chancellor that have been far larger than expected.  The other side of the coin shows it’s been a costly mistake for many people.

An unintended consequence of drawing even a small cash payment is that your Annual Allowance of £40,000 is replaced with the Money Purchase Annual Allowance.  It’s a measly £4,000.

Although you’ve taken a lump sum and not an income (which most of us would regard as a regular payment), your cash payment is treated as an income, and a trigger for Money Purchase Annual Allowance.


2. Flexible Drawdown

Under this option, you can also draw a lump sum from your pension as tax free cash. 

You crystallise some or all of your pension, drawing up to 25 per cent of the amount crystallised as tax free cash. 

If you draw any level of income from the remaining 75 per cent left invested in your pension, you’ll trigger Money Purchase Annual Allowance.

But if you don’t draw income, you’ll retain the ability to contribute the full Annual Allowance.


This particular aspect was discussed recently on Monevator.  The comments below the article reveal just how confusing, and potentially taxing, accessing your pension fund can be.  The best quote by far is this one...

There is something wrong when we have two PHDs arguing about taking their pension, not much chance for the man on the Clapham omnibus....

Just for completeness, how to avoid triggering the Money Purchase Annual Allowance is shown in the pink box below.

Other Tax Consequences Of Drawing Money From Your Pension

If you draw money from your pension that you don’t spend, you may end up inadvertently increasing your Income Tax and your Capital Gains Tax bills, depending on where you place it.

Leaving the money in your pension until you really need to spend it will see you avoid these taxes.  On like-for-like basis, it’ll grow more quickly left in a tax free environment, compared to you investing in a taxable area.

What’s more, because the withdrawn money is now in your estate, it’s potentially liable for Inheritance Tax. 

At the present time, money invested in a SIPP isn’t liable to Inheritance Tax, making it an effective generational tax planning tool.

Unless, of course, the Chancellor has other ideas!

The Budget is on 29 October 2018.  So there’s not much time left if you want to take action under current legislation!

Avoiding The Money Purchase Annual Allowance (MPAA)

Defined Benefit Arrangements

If you receive a scheme pension from any defined benefit or final salary arrangement, this won’t trigger the MPAA.

Small Pots Or Defined Benefits Triviality Payment

The small pots rules were amended to allow three pots of up to £10,000 to be withdrawn from non-occupational defined contribution pension funds.  For occupational defined contribution pension pots, there’s no limit on the number of small pots that can be taken.  It’s paid 25 per cent tax free and 75 per cent subject to marginal rate Income Tax in the same way as an Uncrystallised Funds Pension Lump Sum.  However, a small pots payment does not trigger the MPAA.

Pension Commencement Lump Sum (Tax Free Cash), Nil-Income

Where you have a need for capital, but wish to continue funding in future, then Pension Commencement Lump Sum can be paid with the balance being vested to drawdown (crystallised).  This won’t trigger the MPAA until income is taken from the drawdown plan.

Beneficiary Flexi-Access Drawdown Income

A designation of pension death benefits for flexi-access drawdown does not trigger the MPAA.  This includes income taken from any dependant, nominee or successor drawdown plans.

Disqualifying Pension Credit Usage

You’ll have no access to Pension Commencement Lump Sum from a Disqualifying Pension Credit (as your ex-spouse's pension was already in payment, there would be no further access to Pension Commencement Lump Sum).  Any income taken wholly from a Disqualifying Pension Credit won’t trigger the MPAA.

Accessing Benefits Non-Flexibly

As long as the flexible access detailed above is avoided, then you won’t trigger the MPAA.  An example of this is taking a non-flexible annuity.

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That's our opinion.  Not just because AJ Bell was the first company to offer an online SIPP.  Nor that it's received many prestigious awards.  And not even because the wife of SIPPclub's Founder has an AJ Bell SIPP.  It's because it's one of the most competitive stockmarket SIPPs on the market. 

Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).  However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.

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