SIPP vs Workplace Pension: What's the Smarter Move This Tax Year?

Choosing the right pension scheme early could leave you thousands of pounds better off when you are ready to retire, ensuring you enjoy your golden years.

If you're employed, you'll be automatically enrolled into a workplace pension scheme once you’re earning over a certain amount, where you and your employer contribute a percentage of your salary each month to a pot.

Whether or not you have a workplace pension, it's also possible to open a Self-Invested Personal Pension (SIPP), where your contributions are made into investments that are chosen and managed by you.

Deciding whether to contribute to a workplace pension, a SIPP, or both depends on several factors, including your retirement goals, investment knowledge, and financial situation.

This article will explore both pension schemes in more detail and highlight their differences so you can make the smarter move for your retirement.

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Self-Invested Personal Pension (SIPP)

A SIPP is a modern type of personal pension scheme that gives people greater control and flexibility over their retirement fund’s investments, allowing you to tailor your portfolio to align with your financial goals and risk tolerance.

When setting up a SIPP, you can use a provider that has an in-house investment team that can manage your portfolio in a way that aligns with your goals, or choose to manage the investments yourself. However, if you’re going for the latter choice, it's important to remember that you might need some investment knowledge or the help of an independent financial adviser. This is because you are able to invest in various assets, including bonds, mutual funds, and exchange-traded funds (ETFs).

Like any pension, a SIPP allows you to contribute your annual pension allowance in each tax year. For most people, that’s 100% of your income each tax year, up to a maximum of £60,000.

This annual allowance is made up of your personal contributions, employer contributions, and tax relief (spread across all pension pots you may have). If you exceed the allowance within a tax year, you may be subject to tax charges.

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Workplace Pension

A workplace pension is a scheme offered by your employer as part of your contract. They will contribute to your pension pot, alongside you contributing, too.

By law, the minimum employer contribution is 3%, in which case the employee contribution is 5% to meet the combined minimum of 8% being added. However, in some cases, employers will match what you contribute or offer to contribute more.

If you're self-employed, workplace pensions are not an option because there is no employer to set up or contribute to your retirement pot. This is why SIPPs are a popular choice with the self-employed.

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Key Differences Between A SIPP And A Workplace Pension

Risks: All investing carries risk, whether you rely on your workplace pension or go for a SIPP. However, it’s worth noting that ‘DIY’ style SIPPs can carry additional risk if you don’t have time or investing experience. Many people go for a SIPP that’s managed for you by investing industry professionals to mitigate this risk.

Responsibilities: Once you’re earning over a certain amount, contributions to your workplace pension scheme will happen automatically, unless you opt out. Paying into a SIPP needs to be set up to happen regularly. With a ‘managed’ SIPP, the provider’s investment team should already know your intentions and be able to automatically action the investments. But DIY-style SIPPs may need you to monitor the account and manually invest.

Flexibility and control: Your workplace pension provider will choose your investments, which may not always align with your goals or values. At the same time, a SIPP gives you much more freedom to decide how and where your money is invested.

Investment opportunities: Workplace pensions often limit investment options to a selection of funds. Meanwhile, a SIPP allows investors to choose from a wide range of investment options, including assets, bonds, mutual funds, and exchange-traded funds (ETFs).

Fees and charges: Workplace pension schemes, especially those that are older, come with higher charges, whereas charges on SIPPs can be more competitive. This is an important consideration once your pension pot reaches a large sum.

Retirement options: Not all workplace schemes offer flexible ways to gain access to your money at retirement. Meanwhile, it is often straightforward to withdraw from a SIPP in tax-free lump sums, pension drawdowns, or a mix of both.

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Make The Smart Move This Tax Year

If you're comfortable managing your investments and want a wider range of choices, a SIPP is a very suitable option. It is also an excellent option if you are self-employed and don't have access to a workplace pension scheme.

However, the best pension scheme for you depends on your individual finances, your investment goals, and the risks you are willing to take.

Luckily, you can contribute to a workplace pension scheme and set up a SIPP at the same time. In fact, the smartest move is to have both, so you benefit from employer contributions and government tax relief.

Just remember not to exceed your annual pension allowance if you want to avoid tax charges.