SIPP vs Workplace Pension

If you plan to retire early or you want to enjoy a comfortable retirement, it’s important to start thinking about your pension as soon as possible. SIPPs (self–invested personal pensions) are different from your standard workplace pension, and they may be the perfect option for someone who wants more flexibility with their investments. 

SIPPs can be combined with workplace pensions, and the decision to invest in a self invested personal pension rather than a workplace pension may be due to many different and complex factors. 

This guide will introduce you to SIPP and workplace pensions, and you’ll find out which option is the right one for you.

A SIPP (self invested personal pension) is a pension wrapper and like a workplace pension, it will allow you to build up your pot of pension savings. It is one example of many different personal pensions in the UK. 

SIPPs allow you to save for a retirement, while allowing you to decide where to invest your money yourself. SIPPs are different to workplace pensions – which are usually decided by your employer and are either defined benefit or defined pension contribution schemes. 

One of the main advantages of opting for a SIPP is that a SIPP is considered to be more flexible than standard workplace pensions.

All employers will offer you a workplace pension. If you don’t opt out, you’ll be automatically enrolled into your workplace’s pension scheme. Every workplace pension scheme will allow you to save for retirement, and every month both the employer and the employee will contribute to the pension pot. 

The most common type of workplace pension scheme is a defined contribution scheme. These pensions are made up of employee and employer pension contributions and tax relief from the government.

Defined contribution schemes can also include a group personal pension, group stakeholder pensions and sometimes can also include group SIPPs – although this is rather rare and usually reserved for upper management. 

All defined contribution schemes act in the same way – meaning however much you put into the scheme plus how well your pension investments have performed is how much you’ll receive upon retirement.

SIPP suitability really depends on the individual and their working circumstances and their earnings. SIPPs are aimed at people who feel confident to make their own investment decisions. 

We would recommend that you take the time to assess which option would save you the most money. While opting out of a workplace pension would allow you to keep 5% of your earnings that were destined for the pension pot, you will also not receive your employer’s contribution or the state’s tax relief.

There is another form of a workplace pension that’s less common. A defined benefit pension scheme will calculate your pension based on your salary and how many years you worked for your employer. 

Outside the public sector, direct benefit schemes are not as common as they tend to be more generous.

Tax Benefits and Implications

When considering SIPPs versus workplace pensions, understanding the tax benefits and implications is crucial.

• SIPP: Contributions to a SIPP receive tax relief at the individual’s highest marginal rate. This means that for every £80 you contribute, the government adds £20, and higher rate taxpayers can claim back even more through their tax return. However, managing a SIPP may involve more complex tax considerations, especially if multiple withdrawals or investments are made.
• Workplace Pension: Contributions to a workplace pension benefit from tax relief through the national insurance system, where contributions are often made before tax is deducted from your salary, reducing your taxable income. Additionally, many employers use salary sacrifice schemes, which can further reduce national insurance contributions for both the employee and employer, enhancing overall tax efficiency.

Investment Options and Flexibility

The range of investment options and the flexibility to manage those investments can differ significantly between SIPPs and workplace pensions.

• SIPP: Offers a broad range of investment options including individual stocks, bonds, ETFs, and mutual funds. This flexibility allows for a more tailored investment strategy and the potential for higher returns. However, it also requires a higher level of investment knowledge and engagement.
• Workplace Pension: Typically offers a selection of pre-chosen investment funds, which are managed by professional fund managers. While this limits the flexibility compared to a SIPP, it provides a more hands-off approach suitable for those less confident in managing their own investments.

Yes, you can usually transfer your existing workplace pension into a SIPP, especially if it’s a defined contribution scheme. This can be a useful move if you want to consolidate pensions from multiple employers into one, more manageable SIPP account. 

However, if you’re considering transferring from a defined benefit scheme, you should always seek regulated financial advice as you could lose valuable guaranteed benefits.

In some cases, yes. While it’s more common for employers to contribute to workplace pensions, some may agree to pay into your SIPP if you request it. 

However, you should check with your employer first, and be aware that this isn’t a standard arrangement. Contributions from your employer to a SIPP can still attract tax relief on pensions, but are usually not eligible for salary sacrifice arrangements.

Getting financial advice

If you’re unsure whether a SIPP or workplace pension is right for you, it’s important to speak to a FCA-authorised pension adviser. Making the wrong choice could affect your long-term retirement savings. 

A qualified adviser can help assess your risk tolerance, your goals for retirement, and how each type of pension fits into your wider financial plans. Always ensure that your adviser is providing regulated financial advice.

SIPP schemes are typically not compatible with salary sacrifice schemes. 

A salary sacrifice scheme occurs when an employee is willing to give up a portion of their salary to access particular non-cash benefits from employers and it is a tax-efficient way to contribute to pension schemes. 

Unlike workplace pension schemes, SIPP schemes will typically need higher costs to manage the accounts and they require higher investments. If your pension pot is smaller, SIPP schemes could be less cost effective.

Contrary to popular belief, you can actually invest in a SIPP and workplace pension scheme at the same time. You can open one or more SIPPs alongside your workplace pension scheme, but you should take into account how much you will have to pay tax wise. 

However, although opening multiple SIPPs is allowed, you should really consider your prior investment experience before doing so. You can start to withdraw your SIPP once you turn 55, which could provide greater options than workplace pensions. 

In rare instances, your employer may even contribute to your SIPP if you ask them to.

The choice between SIPP and a workplace pension depends on your needs. Unlike a workplace pension, where an employee must contribute 5% of their yearly earnings to the pension pot, a SIPP scheme will allow for more flexibility. 

You can decide however much to put into your SIPP – whether that’s similar monthly contributions or ad-hoc lump sums. SIPP can be the perfect solution for workers whose earnings may be unpredictable. 

Additionally, most workers will have accrued multiple workplace pension schemes over the years since most people work with many different employers. A SIPP can consolidate all the pension schemes you currently don’t contribute to. 

SIPP owners have a wider range of investment options in comparison to those who just use a workplace pension scheme.

If you’re an employer and you need help with payroll and making sure that your employees get paid properly and are correctly saving towards retirement, payroll solutions can help.

Our payroll software can make sure that your employees are getting paid the correct amount, while our pension auto enrolment software ensures that all of your employees are enrolled into the workplace pension scheme.

For further information and guidance on workplace pensions and how we can help, contact us today.