There are different standards of living many envision for themselves after retirement, and this isn’t something that can be achieved with a few years of savings. Pension schemes have been a saving grace for employees over the years, so much so that the market value of private sector-defined benefits and pension schemes reached £1,179 billion in 2024, a 6% increase from its value in 2023.
The combined market value is still on the rise as workers continue to secure the future they want for themselves. An SSAS pension is one of the most popular alternatives in the private investment market. Here is all you need to know about it and how it compares to workplace pensions.
Small Self-administered Scheme (SSAS) Pensions
SSAS is a common pension scheme that stands under the defined contribution category. It is designed to help a small group of company workers build up their money. In most cases, this scheme is limited to 11 people. While an SSAS holds a lot of similarities to other defined contribution schemes, it is particularly popular for its flexibility in investment and tax efficiency for both members and employees. The investment options can vary from commercial properties and stocks to shares, bonds, and private equity.
At the same time, the savings could be invested into a loan to the sponsoring business for good returns. The goal of these investments is to use the funds saved by the members of the group as capital and multiply the earnings to share towards retirement. In terms of tax matters, SSAS pensions do not warrant a capital gain on investment growth. It also offers some tax relief where taxes you’d normally have to pay to the government on this investment go into the pension pot—i.e., a tax-free lump sum of up to 25% at age 55 and above.
If you’re a business owner or an employee looking for the most flexible alternative, SSAS might be your best bet.
Furthermore, SSAS is a secure option because it is mostly run by a trusted nominee, who is usually also a member of the group. The benefit of SSAS falls to both the employees and workers, and this explains why it’s popular amongst business owners and private enterprises. While the company gets to invest in their own business through the pension, employees also get to save a good sum towards their retirement. It’s clearly a win-win situation, and everyone would agree with this.
Workplace Pensions
Two main workplace pensions have been the most common in recent times – defined contribution and defined benefits.
Defined Contributions (DC)
Defined contributions, sometimes called a money purchase scheme, are a type of pension based on how much is paid in by the participants. This alternative can either be arranged by an employer, just like SSAS, or by the employee. The former works exactly like the SSAS. Money paid by the employee is put into different investments by the provider, and the value increases depending on how high the returns are.
The SIPP (Self-invested personal pension) is another type of DC. The major difference in SIPPs is that it is for individuals, and each person has their own separate pension, unlike SSAS, which is managed in a group. A SIPP also offers a similar wide range of investment options, including stocks, bonds, funds, and commercial property.
Defined Benefits (DBs)
In this category of pension scheme, the employer guarantees a pension based on salary and years of service, regardless of investment performance. So the amount that the employee receives at the end of their service isn’t tied to the performance of investments.
The major limitation here is that it comes with less flexibility and doesn’t explore a wide range of investments to grow employees’ funds. However, it has the advantage of a more secure and predictable return that is not predetermined by asset performances.
Safety and security are the two main priorities when choosing DB, and DCs are tied to financial market performances, which don’t always grow as well as one would expect.
Which Pension is Best?
The dynamics for these schemes are different and should be tailored to individual retirement plans. DB pensions come with the benefits of a guaranteed income for life in retirement, alongside other perks like inflation and employer protection. If this resonates with you, give it a go. On the other hand, SSAS is great for exploring more and building a prospect of higher earnings towards retirement. It is also worth noting the tax advantages and how it positions all players for better returns. There are many other personalised workplace pension schemes to explore, but before making a decision, visit a financial advisor or gather as much knowledge as possible.