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 a workplace pension, and the decision to invest in a SIPP 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.
What is a SIPP?
A SIPP is a pension wrapper and like a workplace pension, it will allow you to build up your pot of retirement 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 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.
What is a workplace pension?
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 contributions and tax relief from the government.
Defined contribution schemes can also include group personal pensions, 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.
Is there another form of a workplace pension?
There is another form of a workplace pension that’s less common. A direct benefit 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.
Should I choose a SIPP or workplace pension scheme?
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.
Are there any drawbacks to SIPP schemes?
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.
Can I have a SIPP and workplace pension at the same time?
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 tax you will have to pay.
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 a workplace pension.
In rare instances, your employer may even contribute to your SIPP if you ask them to.
Who is a SIPP suitable for?
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.
A SIPP scheme might be the perfect investment for you and could work for you better than a traditional workplace pension. SIPPs allow for flexibility and independence from workplace pension schemes.
However, we would recommend that SIPPs are for those who are already savvy investors. You can open a SIPP while still contributing to your workplace pension, allowing you to get the best of both worlds.
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.