SIPP vs Workplace Pension What You Need to Know

A self-invested personal pension (SIPP) is a type of pension that you set up and contribute to yourself.

You can open a SIPP from the age of 18, although parents and grandparents can open a Junior SIPP on behalf of their children and grandchildren.

SIPPs allow you to make regular contributions to your pension pot and the amount of money available when you decide to retire depends on:

• how much you pay in
• how your money is invested
• how the investments perform
• how much you pay in fees
• how and when you take money out of your pension

Some of the pros and drawbacks of SIPPs to consider include:

Reasons to use

• SIPPs usually offer a wider choice of investment options than most personal pension plans such as commercial property and private company shares
• Flexibility to choose your own investments
• You might get tax relief on pension contributions
• You can consolidate other pensions into a SIPP
• You can take a 25% tax-free lump sum when you hit 55 (or 58 from 2028)

Reasons to avoid

• A SIPP is likely to be more expensive than a personal pension or a workplace pension
• There is investment risk to consider

A workplace pension is set up by your employer and is usually managed by an external company.

In 2012, new rules were introduced to make sure employers automatically enrolled eligible employees in a pension scheme.

Workplace pensions work by you and your employer making regular contributions to your pension pot which is then invested on your behalf by the pension company.

You can also make extra contributions to your workplace pension.

There are two types of workplace pension:

• Defined contribution: You and your employer contribute to a pension pot, which is invested in the stock market to grow your money.
• Defined benefit: You receive a specified amount of money each year when you retire, depending on how long you’ve worked at a company and your salary. (These tend to be less common these days.)

Some of the pros and drawbacks of workplace pensions to consider include:

Reasons to use

• Benefit from employer contributions
• Tax relief on pension contributions
• Potential to use investment growth to grow your fund
• Easier to plan for the future

Reasons to avoid

• Potentially limited investment range
• Fees to transfer your pension
• You could lose employer contributions
• Investment risk means the value of your fund could go down

SIPPs offer more flexibility and freedom to manage the investments held within your pension.

Workplace pensions can be less flexible, however, you get the benefit of contributions from your employer as well as tax relief from the government.

Some employers offer a match scheme, which means that they will add the same amount into your pension as you do, which boosts your overall pot.

The best type of pension for you depends on your circumstances and the accounts available to you.

It is possible to have both a SIPP and a workplace pension.

It’s important to consider how contributing to both might affect your annual pension allowance which is currently the lower of £60,000 or up to 100% of your income.

Your allowance is the amount you can pay into your pension without having to pay any tax.

The rules around pensions are tricky and if you’re unsure of the best strategy for your retirement income it’s worth seeking independent financial advice for tailored guidance.

You can transfer an old workplace pension into a SIPP, this is known as pension consolidation.

Transferring old workplace pensions into a SIPP could help to simplify managing your retirement pots. It could also help you reduce the impact of fees on your pension.