The two most popular pensions in the UK are the Self-Invested Personal Pension (SIPP) and the Workplace Pension.
But what are the differences between them, which is better, and can you have both at the same time?
Can I Have A SIPP And A Workplace Pension?
Yes, you can have both a SIPP and a workplace pension at the same time.
Here are some key points about having both:
- SIPPs and workplace pensions are separate schemes. You can pay into both at the same time, but you can’t exceed your annual allowance for the year between the two, which is £60,000 or your salary – whichever is lower.
- For workplace pensions, your employer usually has to contribute at least 3% of your qualifying earnings. This is free money you wouldn’t get if you only had a SIPP.
- Both have tax benefits – you get tax relief on contributions to both up to annual limits. For SIPPs this is 100% of your earnings or £60,000, whichever is lower.
- SIPPs offer more investment flexibility usually than workplace schemes. You can self-select funds or invest in a wider range of assets.
- Workplace pensions may have lower fees than SIPPs due to the provider dealing with multiple employees.
- You can consolidate pensions into one pot later on if you want to simplify things.
Let’s go into more detail about the specifics of SIPPs and Workplace Pensions, how they differ, and more.
|SIPPs (Self-Invested Personal Pension)
|Control over Investments
|Yes but not automatic
|Wide range (e.g., stocks, property)
|Limited options through provider
|Usually tied to the employer
|Management and Fees
|Individual management, fees vary
|Managed by provider, fixed fees
|Tax relief on contributions
|Tax relief and NI relief on contributions
|Standard set by provider
|Flexibility in Withdrawals
|Typically less flexibility
|Level of Risk
|High (depending on investments chosen)
|Generally lower risk
What Is a SIPP?
A Self-Invested Personal Pension (SIPP) is a type of pension that offers you a more hands-on approach to retirement savings.
Unlike conventional pension schemes, SIPPs grant you greater control and flexibility over how your pension funds are invested.
This means you can choose from a wide array of investment options, including stocks, bonds, mutual funds, and commercial property, tailoring your pension portfolio to align with your risk appetite and financial goals.
What Is A Workplace Pension?
On the other hand, Workplace Pensions, also known as occupational or company pensions, are established by employers to help their employees save for retirement.
These pensions are often arranged through the workplace and provide a valuable long-term savings avenue.
Usually, both employers and employees contribute to the pension fund, offering a financial cushion post-retirement.
How Do SIPPs Work?
A SIPP operates as a private pension plan.
Unlike conventional pension schemes that limit investment options, SIPPs offer a broader spectrum of investment choices.
You have the autonomy to select from a diverse range of assets, including equities, bonds, mutual funds, and even commercial property or individual stocks.
This flexibility grants greater control over the investment strategy, allowing you to tailor your pension portfolio according to your risk tolerance and financial objectives.
Benefits of SIPPs Compared to Other Pension Options
The primary value of SIPPs lies in their flexibility.
Unlike traditional pension plans, which often come with predefined investment strategies, SIPPs allow for a more tailored approach.
This customisation permits investors to adapt their pension portfolio as their financial circumstances and objectives evolve over time.
Additionally, the potential for higher returns exists within SIPPs, although this also brings an increased level of risk compared to more conservative pension schemes.
Who Can Open A SIPP
While SIPPs offer extensive investment freedom, there are specific eligibility criteria to consider. Generally, individuals under the age of 75 are eligible to open a SIPP, but specific providers may impose additional restrictions or requirements. Understanding these criteria is pivotal for those considering a SIPP as part of their retirement planning strategy.
How Do Workplace Pensions Work?
A Workplace Pension Scheme is a retirement savings plan organised by employers for their workforce. They are now compulsary for anyone over 22 and earning at least £10,000 per year.
They are structured to help employees set aside funds for their retirement years.
One of the key features of Workplace Pensions is their simplicity; they provide a hassle-free way for employees to save for retirement through contributions deducted directly from their salaries.
One significant advantage of Workplace Pensions is the potential for employer contributions.
In most cases, employers are obliged to contribute to their employees’ Workplace Pensions, offering an added financial incentive for employees to participate. This employer contribution, often a percentage of the employee’s salary, boosts the overall pension pot for free.
Comparatively, this employer contribution distinguishes Workplace Pensions from SIPPs.
Although your employer can contribute to your SIPP, they would need to do this in place of your Workplace Pension, and the former is more common.
Enrollment Process and Employee Contributions
Enrolling in a Workplace Pension Scheme typically occurs automatically or through an opt-in process, depending on the company’s policy.
Employees usually contribute a percentage of their salary to the pension scheme, which, when combined with the employer’s contributions, accumulates over time to form the retirement fund.
The minimum is 3%, and it’s up to the employer to decide on the maximum – obviously, the more the better for your retirement savings.
Pros and Cons of Having a SIPP and Workplace Pension
One of the primary advantages of maintaining both types of pensions is diversification.
SIPPs offer unparalleled flexibility in investment choices, enabling individuals to explore a wide array of assets to build a tailored portfolio.
On the other hand, Workplace Pensions come with the advantage of employer contributions, providing a valuable financial boost to the retirement fund.
However, managing both SIPPs and Workplace Pensions can be complex and may require careful oversight.
Additionally, having both pensions could affect your annual allowance and tax relief eligibility, which requires careful consideration. You need to be careful not to contribute in total more than your annual allowance in private pensions in each tax year. It’s £60,000 or your annual income – whichever is lower.
Professional Advice for Optimising Pension Contributions
Engaging a financial advisor or pension specialist such as our service at SIPP Advice can be invaluable in optimising pension contributions.
We offer personalised guidance tailored to your financial circumstances and retirement aspirations to take all the guesswork out of your retirement planning.
We can help navigate complex pension regulations, maximise tax efficiency, and devise a strategic plan for allocating contributions between SIPPs and Workplace Pensions to ensure you’re maximising your allowances.
Book a free initial consultation with an adviser below to find out how we could help you.
Can you have a private pension and a workplace pension?
Yes, it’s entirely possible to have both a private pension (such as a Self-Invested Personal Pension – SIPP) and a workplace pension simultaneously.
Having both allows you to diversify your retirement savings strategies, leveraging the benefits offered by each type of pension.
Can I transfer part of my work pension to a SIPP?
Yes. In most cases, it’s possible to transfer part of your work pension to a SIPP.
However, this largely depends on your pension provider’s terms and conditions, and not all workplace pensions permit partial transfers. Consulting with your pension provider and a financial adviser is advisable to explore this option.
Can I have a final salary pension and a SIPP?
Yes, it’s possible to have a Final Salary Pension (also known as Defined Benefit Pension) and a SIPP simultaneously.
However, transferring a Final Salary Pension to a SIPP is a significant decision and requires careful consideration due to the valuable benefits associated with Final Salary Pensions. We recommend speaking to a financial adviser if you’re considering this.
Can self-employed have a workplace pension?
Yes, self-employed individuals can set up their own workplace pension.
There are various options available, such as a self-employed pension scheme or a stakeholder pension, allowing self-employed individuals to save for retirement in a structured manner.
Can I have 2 pensions?
Yes, individuals can have multiple pensions simultaneously.
It’s common for people to accumulate pensions from various employments or personal contributions over their working lives, creating a diversified retirement portfolio.
Does my company pension reduce when I get State Pension?
Usually, your company pension does not reduce when you start receiving the State Pension.
Your company pension and the State Pension are separate and paid independently, providing additional income during retirement.
Can my employer pay directly into my SIPP?
Yes, it’s possible for employers to contribute directly to an employee’s SIPP.
This can occur through employer pension schemes or arrangements specifically allowing employer contributions to a SIPP.
Does my employer have to pay into my SIPP?
Employers are not obligated to pay into an employee’s SIPP.
Employer contributions typically go into workplace pension schemes, but if agreed upon, employers can contribute to an employee’s SIPP. It’s best to contact your employer about setting this up or get help from an adviser if you’re unsure.
Should I have a SIPP if I have a company pension?
Having a SIPP alongside a company pension can offer additional flexibility and control over your retirement savings.
However, the decision depends on individual circumstances, risk tolerance, and investment preferences. Seeking financial advice can help determine if a SIPP complements your existing company pension.
Is a SIPP better than a workplace pension?
Whether a SIPP is better than a workplace pension depends on individual preferences, investment goals, and circumstances.
SIPPs offer more investment control, while workplace pensions often come with employer contributions. The best choice may involve a combination of both to maximise retirement savings.
Remember, you typically get tax relief on both your National Insurance payments and income tax when you contribute to a workplace pension, whereas with a SIPP it’s just income tax.
Can I take 25% out of my final salary pension?
Typically, you can take a tax-free lump sum of up to 25% from your Final Salary Pension when you access it.
However, the rules and options for accessing a Final Salary Pension vary, and it’s advisable to check with your pension provider or seek financial advice before making any decisions.
Always consider seeking personalised financial advice or consulting pension providers for specific and tailored guidance based on your unique circumstances and retirement goals.