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Retirement planning in the UK has been in significant flux over the last couple of decades. Proposed pension dashboards and “pot for life” schemes, which the government still maintains its commitment to, have not fully materialised. However, the most notable change in 2024 is the recent abolition of the Lifetime Allowance for pension savings.
This pivotal shift has sparked discussions among cash savers and financial advisers about the implications for retirement planning strategies. In particular, self-invested personal pensions (SIPPs) may become an even more popular component of the average cash saver’s portfolio. They can often help individuals seeking greater control and flexibility over their retirement funds.
To explore this in detail, let’s first examine the history of the Lifetime Allowance – and what now succeeds it.
The Lifetime Allowance was introduced in 2006. It set a cap on the total amount of pension savings that an individual could accumulate over their lifetime, without incurring additional tax charges. In subsequent years, the Lifetime Allowance underwent numerous revisions. Reductions in the cap triggered concerns among pension savers about potential tax liabilities if they exceeded the limit.
However, the UK government announced the abolition of the Lifetime Allowance in the 2024 Budget statement. This move effectively removes the ceiling on pension savings. In turn, individuals should have greater freedom to accumulate wealth within their pension schemes without facing punitive tax consequences.
This move effectively removes the ceiling on pension savings. In turn, individuals should have greater freedom to accumulate wealth within their pension schemes without facing punitive tax consequences. Some transitional calculations are also available for those that have already used up their Lifetime Allowance. (In these cases, the Standard Transition Calculation or Transitional Tax-Free Amount Certificates may offer clients further allowance.)
However, in place of the Lifetime Allowance now comes the Lump Sum Allowance (LSA) and Lump Sum Death Benefits Allowance (LSBDA). The LSA and LSDBA impose limits on the amount of tax-free withdrawals. These are currently set at the same rate as the outgoing 2023/2024 Lifetime Allowance: the LSA is set at 25% of £1,073,100 (£268,275) and the LSDBA at £1,073,100.
With all this in mind, how might abolishing the Lifetime Allowance enhance the appeal of SIPPs?
SIPPs have become an increasing popular choice for retirement planning. These offer cash savers a wide range of investment options, and greater autonomy over their pension funds. Traditional pension schemes can often limit investment choices to a predefined selection of funds. By contrast, SIPPs allow individuals to invest in a diverse array of assets. These might include:
In theory, abolishing the Lifetime Allowance should further amplify the appeal of SIPPs. This is because the cap on pension savings previously imposed by the Lifetime Allowance threshold has been eliminated.
Cash savers can now fully leverage SIPPs to optimise their retirement portfolios, and tailor investments according to their unique financial goals and risk appetite. Whether seeking long-term capital appreciation, income generation or portfolio diversification, investors can create their SIPP holdings without the fear of exceeding a predetermined limit.
Following the abolition of the Lifetime Allowance, savers can accumulate substantial pension savings without triggering punitive tax charges on withdrawals or transfers. SIPPs offer tax advantages at various stages of the retirement journey. These include:
Furthermore, SIPPs provide individuals with greater control over the timing and structure of their withdrawals. This allows for strategic tax planning to minimise tax liabilities, which in turn optimises retirement income. Tax-efficient investment strategies within SIPPs might include asset allocation, tax harvesting and pension income drawdown techniques.
SIPPs can also be an effective tool for succession planning. With the greater freedom that was introduced as part of pension reform in 2015, coupled with the removal of the Lifetime Allowance, savers can build larger pension pots that can be passed on to their nominees and successors.
Abolishing the Lifetime Allowance marks a significant milestone in the evolution of retirement planning in the UK.
It’s down to cash savers (and their financial advisers) to ensure that they take full advantage of the greater flexibility now on offer. By eliminating the constraints of a lifetime limit on pension savings, individuals are now empowered to assume greater autonomy over their retirement journey. This allows them to leverage the tax advantages offered through pension savings to secure their financial futures.
However, SIPPs also entail risks associated with investment volatility, market fluctuations and individual investment decisions. As such, savers should be prudent. Advisers should carefully consider the financial circumstances and objectives of their clients, as well as their risk appetite and capacity for loss over their retirement planning time horizon.
Nonetheless, SIPPs stand out as a possible vehicle that cash savers who are looking to build, and preserve, a flexible retirement income solution might consider.
To find out more about partnering with Insignis Cash, and using our platform to access SIPP and SSAS products, click the button here.