Before you start planning trips you want to take in your golden years, you need to ensure there will be enough gold in that pot. You probably have a workplace pension already, but you can explore self-invested personal pensions if you feel a bit more adventurous.
SIPPs are generally best for seasoned investors who are familiar with financial markets. Workplace pension schemes require no investment experience from you, and their additional tax relief methods can make them cheaper for you in the long run.
So which is right for you, just one or both? Find out below.
SIPP or Workplace Pension: What’s the Difference?
Choosing between the two can be daunting – so here are the main features of SIPPs and workplace pensions along with their upsides and downsides.
Full control | Obligatory employer contribution | Wide choice of investment options | Tax relief | Risk | Admin | |
|---|---|---|---|---|---|---|
SIPP | ✔️ | ❌ | ✔️ | ✔️ | Higher | More |
Workplace pension | ❌ | ✔️ | ❌ | ✔️✔️✔️ | Lower | Less |
Key Features of a SIPP
A self-invested personal pension (SIPP) is a type of personal pension plan that offers a high degree of control over your investments, including how much, how often, and where you invest your money. You can choose to make regular contributions, lump-sum payments, or both, and you can easily adjust the amount. Additionally, your employer can choose to contribute to your pension fund, providing even more financial security.
However, as a SIPP holder, you are responsible for managing your investments. If you have little or no investment experience, this can be risky, as ill-considered decisions could jeopardise your funds. Therefore, SIPPs are generally best suited for experienced investors or those who can afford to hire a financial advisor.
Compared to workplace pensions, SIPPs typically offer a broader range of investment options, providing an opportunity to increase your earnings. While it varies across SIPP providers, these accounts usually grant you access to;
Shares,
Unit trusts,
Open-ended investment companies,
Real estate investment trusts,
Offshore funds.
However, the higher level of control and investment choice often comes with higher management costs compared to other types of pensions. As charges are generally higher, a self-invested personal pension is more cost-effective for larger pension pots.
Advantages and Disadvantages of SIPPs
- You have a wider choice of investment options.
- Full control of how much you want to invest and where.
- You can combine several pensions into one SIPP.
- You can contribute to a SIPP until the age 75 (no tax relief after that).
- SIPPs often come with higher charges.
- An investment going wrong could reduce your pension in the end.
- You cannot access your SIPP until age 55 (or 57 from 2028).
Key Features of a Workplace Pension
A workplace pension is a type of pension fund managed by your employer and pension provider. Compared to SIPPs, you don’t have nearly as much say in where, how often, or how much of your money is invested.
According to ONS, 79% of eligible UK employees participated in a workplace pension in 2021, or 22.6 million people.
Defined-Benefit vs Defined-Contribution Schemes
Workplace pensions come in two main types: defined benefit and defined contribution schemes.
A defined-benefit scheme offers you a pension based on the number of years spent at the company and your salary, making the amount highly stable and secure. Unfortunately, it’s a rare occurrence outside of the public sector. If you have one, add a personal pension if you like, but don’t give up your holy grail of pension types.
On the other hand, in a defined contribution or a money-purchase scheme, the final amount you receive depends on the amount paid in by you (+ your employer + tax relief) and the success of the investments made with the money. Most workplace pensions are defined-contribution.
Your Employer Is Obligated to Contribute to Your Pension
While employers can contribute to a SIPP, they are not obligated to — and this is where workplace pensions truly shine. With a workplace pension, your employer has to make automatic contributions of at least 3% of your earnings. Typically, employee contributions amount to about half of company contributions.
Also, contributions are automated through payroll and it is your employer that needs to handle most of the admin — you just sit back and relax.
Another benefit of workplace pensions is that they come with three methods of tax relief: relief at source, net pay, or salary sacrifice, which in some cases means lower National Insurance contributions for both you and your employer.
Advantages and Disadvantages of Workplace Pensions
- Employer contribution is obligatory.
- You don’t need investing experience.
- Contributions are automated.
- You have three types of tax relief: relief at source, net pay or salary sacrifice.
- You don’t have as much control over your investments.
- You get fewer investment options.
Both SIPPs and workplace pensions are registered pension types. They also come with tax relief options, meaning the government contributes to your pension in a way as well. Your employer can contribute to both types, however, they are obligated to contribute a minimum of 3%.
The key difference stems from the flexibility and control a self-invested personal pension provides. This puts the SIPP into a high-risk-high-reward zone. On the other hand, a workplace pension typically comes with employer contributions that are frequently double that of the employee.
Which One Is Better — a SIPP or a Workplace Pension?
The answer depends on your investment experience, willingness (and financial means) to take risks, and pension schemes you may already have. Let’s look at some cases where one or the other is better.
Cases Where SIPPs Are a Great Choice
SIPPs are primarily made for people who are comfortable with investing. If you have already maximised your workplace pension, and wish to take control of the rest of your funds and feel confident in your investment abilities, a SIPP is exactly what you need.
If you’re self-employed or have spent a significant amount of time off full-time work, you will need to get some kind of personal pension. However, consider a SIPP if you have sufficient investment knowledge and experience.
Another case SIPPs are good for is if you have several workplace pensions and you want to consolidate them into one scheme. This could save you time and effort by reducing the amount of administrative tasks you need to do.
Most people have worked for several employers with multiple pension schemes, while their current workplace usually pays only into one scheme. So, keeping them all in one place enables you to monitor your pension savings more easily. However, if you have a defined-benefit workplace pension, it might come with additional benefits that may outweigh the benefits of consolidation.
When You Should Stick to a Workplace Pension
You usually don't need to give up your workplace pension, unless you want to consolidate several pensions into one. If you're looking to increase your savings, you might consider raising your contributions to your workplace pension. Although rare, your employer may match your contributions, which means more money in your pension fund.
Enjoying your workplace pension is also tax-efficient. With the salary sacrifice tax-relief method, you can increase your fund with income tax relief and save on National Insurance. If you are a basic rate taxpayer (that’s earning less than £50,270), you can keep another 12% in your pocket, and 2% on income above £967 a week.
Can You Have More Than One Pension Plan?
Yes, you can have both a workplace pension and a SIPP, in fact, you can have as many pensions as you want. As long as you don't exceed your annual and lifetime allowances, you can still get tax relief on both. Here's what you need to know:
Having Both a SIPP and a Workplace Pension
Having a combination of a SIPP and a workplace pension can offer you the best of both worlds. You can enjoy the security of the workplace pension, and then put any extra savings into a SIPP if you feel confident doing so.
Both personal pensions and workplace pensions are eligible for tax relief. The government automatically tops up your payment with 20% to your pension provider if you're a basic rate taxpayer (earning less than £50,270). However, if you're a higher- or additional-rate taxpayer, you have to request extra tax relief on your returns.
However, it's important to keep an eye on your annual and lifetime pension allowances to avoid losing tax relief benefits. Let's get into the numbers.
Annual Pension Allowance and Pension Lifetime Allowance
If you opt for a combination of a SIPP and a workplace pension, make sure your annual contributions do not exceed £60,000.
Pension lifetime allowance, or the total sum of all your pension pots is currently £1,073,100. This means you will pay tax on any amount that exceeds this value.
Making Your Final Pension Decision
If weighing investment options doesn’t sound relaxing to you, a classic workplace pension is a better choice for you than a SIPP. On the other hand, if you’re self-employed, you will have to get some sort of private pension and choose between a SIPP or another type of personal pension. In many cases, you don’t even have to make a choice: if you have additional income and investing experience, you can have both a workplace pension and a SIPP.
Finally, the choice isn’t only between pension types. Some pension providers could meet your personal needs better than others, so research them thoroughly. After all, a pension is all about security.
FAQ
Can I have a SIPP and a workplace pension?
What are the pros of having both a SIPP and a workplace pension?
What are the cons of having both a SIPP and a workplace pension?
What are the disadvantages of a SIPP?
Additional Resources
- It's generally possible to transfer your pension to another provider and this could be a great way to save more money and get the most out of your pot. In this guide, we'll look at how you can transfer your pension, your eligibility to do so, and any other factors to consider before taking the plunge.
- What is (hopefully) one of the cheeriest of occasions, retiring abroad, can and often is soiled by an endless amount of paperwork and one big question: whatever will happen to my pension? It seems daunting, but once you understand the process, you'll see it's not rocket science. Here, we explain how it works.
- Regardless of your current financial situation and how young you are, building a substantial pension pot is essential. People work throughout most of their lives, and their retirement is the only time they can kick back, relax, and enjoy the benefits of their hard work.
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- Private pensions are retirement savings plans that savers set up, and contribute to, by themselves. They are one of the most popular ways of securing a comfortable life in retirement, and most financial institutions offer some kind of private pension scheme.
- Your child might be decades away from retiring – but helping them build their pension early on will help them have a sizable pot once they reach retirement age. With the ability to deposit up to £3,600 per year without paying income or capital gains tax, a junior SIPP account is an excellent way to do so.
- When you leave an employer, any benefits that have been accrued in your pension will not be lost, as the fund actually belongs to you. This means that even though you are no longer working with that particular company, you will remain a member of their pension scheme and your money will stay invested as it was prior to leaving.
- A limited company pension provides a tax-efficient way for the company to build your pension pot for retirement. According to the latest data, most companies in the FTSE 100 channel between 7.5% and 11.5% of the director’s salary to their pensions.
