SIPP vs Personal Pension: Which One Should I Get?

A self-invested Personal Pension (SIPP) account allows you to choose your own investment opportunities. In other words, a SIPP lets you control where the money goes. For instance, you could opt for stocks or bonds, as well as collective investments such as unit trusts, commercial property, or investment funds.

Yet, actively managing your own investments could be a double-edged sword because you’ll be responsible for the money’s performance.

The UK government introduced Self-Invested Personal Pensions in 1989 to boost overall savings and give savers more control over their pension pot.

To sum up, SIPPs offer greater control over your investments and could lead to higher returns than personal pensions. With SIPPs, savers can choose from various investment options and change them as their circumstances change. Thus, a SIPP follows a DIY approach to retirement planning.

A personal pension can act as an alternative or supplement to your workplace pension, but they all share the same goal — having a regular income in retirement. Yet, unlike the defined contribution scheme your employer will enrol you in, personal pensions offer more freedom and flexibility. As the name suggests, with a personal pension, an individual can choose a pension provider to save for retirement.

Most importantly, the standard personal pension is straightforward and much easier to set up than a SIPP. It’s professional fund managers that will handle and invest your money. Then again, the lack of control could cause missed investment opportunities you could otherwise pursue with a SIPP.

On the other hand, private pensions typically offer lower fees and less risk than SIPPs, making them a good option for savers looking for a hands-off approach to investing.

In short, the crucial difference between personal pensions and self-invested personal pensions lies in controlling the investments. With a SIPP, savers can direct the funds and navigate investment opportunities with complete authority, or with the help of a regulated financial adviser. Personal pensions don’t offer this feature.

So, UK savers who know what they are doing could benefit from a SIPP. On the other hand, personal pensions are best for those looking for expert-managed investments.

Personal pensions are similar to traditional pensions regarding money control and flexibility. More precisely, the providers handle the investments, primarily opting for low-risk options to ensure long-term growth.

Like SIPPs, personal pensions also offer tax benefits, including tax relief on contributions and tax-free growth. So, regarding taxes, SIPPs and personal pensions are identical, and you don’t have to worry about paying more tax for either pension account.

Both SIPPs and personal pensions allow regular deposits or lump sum payments, with a personal annual allowance (PEA) of £60,000 for both account types at the time of writing.

Tax relief tariffs vary depending on your tax-payer status, with the basic tax rate at 20%. The rate can grow to 40% or 45% for the higher or additional rate taxpayers. Hence, your income level determines the allowance.

Any UK resident older than 18 can open a SIPP or personal pension. Of course, banks and building societies might set up contribution limits and other eligibility criteria. Nonetheless, the conditions are relatively straightforward.

According to UK legislation, Brits can hold and consolidate multiple pension schemes, including SIPPs and personal pensions. Yet, the contributions are subject to annual limits, i.e. both pensions count to the same annual allowance.

In theory, if you put aside the practical aspects of this decision, you could have both a SIPP and a personal pension. But, in reality, many UK savers only have workplace pensions, let alone two private pension accounts.