Should I get a SIPP or workplace pension?

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Fact Checked.
Updated on
August 16, 2022

In a nutshell

You don’t have to choose between a SIPP and a workplace pension! Instead, you can have both. Your workplace pension will allow you to unlock free money from your employer, while a SIPP is a great way to boost your savings for retirement.

Nutty

Pensions are designed to help you save for retirement, so that you can live your golden years to the full. So, starting a pension is super sensible. But there are a few different kinds of pensions floating around. 

If you’re umming and ahhing about whether a SIPP or a workplace pension is best for you, guess what? You don’t actually have to choose between them. In fact, having both is often a really good shout. Here’s the lowdown.

SIPP or workplace pension: what’s the difference?

Okay, to start with, you’ll probably want to know the difference between a SIPP and a workplace pension. They’re both great ways of saving for retirement. But, surprise surprise, they’re great in different ways!

What’s a SIPP?

SIPP stands for self-invested personal pension. It’s a type of personal pension, which means it’s one you set up yourself (in contrast to workplace pensions, which are pensions your employer sets up for you).

What’s a SIPP?

Personal pensions like SIPPs work a bit like piggy banks. You pay money into them throughout your working life. Then, once you reach a certain age – normally 55 – you can start withdrawing your money.

Oh, except they’re way better than piggy banks as hopefully, by the time you retire, you’ll have much more money to withdraw from your pension than what you actually paid in, in the first place. Pretty great, huh? This is because of a couple of things. 

Firstly, you won’t have to pay any tax on the earnings (like your salary) that you pay into your pension, known as tax relief. Instead, the tax you’ve paid on those earnings will get refunded straight into your pension pot by the government, to help boost your savings. Nice!

SIPP tax relief

And secondly, your savings will get invested – that’s when they’re used to buy things like stocks and shares (which essentially means you own small parts of companies). As your investments increase in value, your savings will too!

With most personal pensions, your money will grow without you having to lift a finger, as your pension provider (the company looking after your pension) will invest your savings for you. However, with a SIPP, you’ll need to spend time investing your savings yourself (there’s a reason it’s called a self-invested personal pension!). That’s right, you get to choose your investments and you’re responsible for managing your investment strategy.

If you’re a bit of a pro when it comes to investing and you want more control over where your money goes, a SIPP could be right up your street. But if you’re a beginner and you’d rather have an expert’s help, a traditional SIPP probably won’t be for you.

Having said that, there are some newer, partially-managed SIPPs that act as a bit of a middleground. With these, you still get to make the investment decisions, but you choose from just a few options that have been carefully picked out by your pension provider – and they manage your investments for you. So, it’s a lot less complicated and more beginner-friendly! 

Check out our selection of the best private pension providers UK to get started. 

What’s a workplace pension?

A workplace pension is a pension that your employer sets up for you. If you’re employed, the chances are you already have one of these. Usually, your employer will legally have to provide you with one.

With a workplace pension, you need to pay at least 5% of your earnings into your pension each month. But the great news is that your employer will also have to contribute to it – at least 3%, straight from their own pocket. Yep, it’s basically free money!

Workplace pension

Just like a SIPP, most workplace pensions work like piggy banks – you and your employer will contribute to your pension throughout your working life, and then once you reach the age of 55, you’ll be able to start withdrawing your money.

You’ll still benefit from that lovely tax relief we told you about earlier (remember how we said that you won’t have to pay tax on the earnings that you pay into your SIPP?). The only difference is that instead of your tax being refunded into your pension pot, you’ll simply pay less tax in the first place – as your tax will be calculated and deducted from your payslip each month.

Workplace pension tax relief

Oh, and your savings will still get invested – you’ll just get to rely on your pension provider to do it for you, instead of having to choose your investments yourself. Simple!

What’s better: a SIPP or a workplace pension?

SIPPs and workplace pensions are both great in different ways. So, it’s REALLY hard to give a straight answer on this. But we’ll do our best to break it all down for you.

First things first, SIPPs tend to have cheaper fees than workplace pensions – and most personal pensions too! That’s because with traditional SIPPs (ones where you buy and sell investments yourself), you won’t be relying on your pension provider to spend time trying to grow your savings for you. Instead, you’ll be putting the hard work in yourself.

Another great thing about SIPPs (and other personal pensions) is that you can choose your own pension provider – unlike workplace pensions, where your employer will pick out a pension provider for you. 

Comparing a workplace pension and SIPP

Being able to choose your own pension provider is great because it means you can pick one with lovely low fees and great investment opportunities. If you’re after one of those partially-managed SIPPs we told you about, you can also make sure your pension provider has a great track record for growing people’s pensions, meaning your savings will hopefully grow quicker than they would in a workplace pension. Woohoo!

So far, SIPPs are sounding like the winners, right?

Well, they are pretty great. BUT workplace pensions have one majorly awesome thing going for them: your employer has to contribute! Remember how we said they’ll contribute at least 3% of your salary to your pension pot, from their own pocket each month? That could be a lot of free money!

Because of that, even though SIPPs trump workplace pensions in many ways, we’d always recommend getting a workplace pension if you’re offered one. After all, you’d be mad to turn down free money! Which brings us onto…

Should I get a SIPP or a workplace pension?

Let’s be really clear here: if your employer offers you a workplace pension, you should definitely take it. After all, a workplace pension means you can unlock free money from your employer!

However, here’s the important bit… you don’t actually have to choose between the two! Instead, we should really be asking ‘should I get a SIPP as well as a workplace pension?’

And the answer is yes! If you have extra cash that you can set aside for retirement, starting a SIPP (or another kind of personal pension) on top of your workplace pension is usually much more sensible than increasing your workplace pension contributions.

You know how we said that with a personal pension like a SIPP, you can choose your pension provider yourself? Well, that means you can save money by choosing a pension provider with lovely low fees.

Should I get a SIPP or workplace pension?

If you opt for a SIPP, you’ll also be able to choose a pension provider that can offer you a wide range of investment options, to suit your preferences. Or, if you go for a partially-managed SIPP, like Penfold, you can make sure your pension provider has a good track record for growing pension savings quickly (check out PensionBee too, here’s our PensionBee review).

There’s just one exception. 

A few very lovely employers will offer to match your pension contributions – in other words, if you pay more than the minimum 5% of your salary into your pension, they’ll follow suit and will also pay more into your pension. Get in!

If you’re one of these lucky people, it’ll probably be more sensible for you to put any extra cash into your workplace pension, rather than into a SIPP, as it’ll mean unlocking more free money from your employer. However, most employers will only increase their contributions by so much. So, once you’ve maxed out what you can get from them, then it’s time to start thinking about starting a personal pension, like a SIPP. Makes sense, right?!

Is it definitely okay to have more than one pension?

Yes! There’s nothing to stop you from having a SIPP and a workplace pension at the same time. In fact, there’s nothing to stop you from having as many pensions as you want! We mean it: you could have 50 pensions if you wanted (although we definitely wouldn’t recommend that – they’d be way too hard to keep track of!).

How many pensions can you have?

However, even though there aren’t any limits to how many pensions you can have, there are a few rules about how much you can pay into them to keep in mind.

Annual allowance

The annual allowance is a limit to how much you can pay into your pensions as a whole, while still getting all the lovely tax benefits that pensions normally come with.

At the moment, the annual allowance is £40,000 or 100% of your salary – whichever is lower.

Pension annual allowance

That means if you earn £30,000 per year, your annual allowance will be £30,000 (it’s the same as your salary because you’re earning under £40,000). But if you earn £50,000 per year, your annual allowance will be £40,000 (because you’re earning more than £40,000). Make sense?!

The only exception is if you’re over the age of 55 and you’re taking an income from your pension already. In this case, your annual allowance will be quite a bit lower – normally just £4,000.

So, what happens if you go over your annual allowance? Well, you won’t be able to claim that wonderful thing called tax relief on the extra money – which might mean you’re better off doing something else with it instead (like stashing it away in another type of savings account – for instance, a Stocks & Shares ISA or a Lifetime ISA. Check out our best investment platforms UK to learn more).

Lifetime allowance

The pension lifetime allowance is a limit to how much you can withdraw from your pensions over the course of your lifetime.

Currently, the lifetime allowance is £1.073 million – and it’s set to stay that way until at least 2026.

Pension lifetime allowance

We know what you’re thinking: ‘There’s no way this applies to me – I’m never going to be able to save more than £1.073 million!’

Well, guess what? It’s easier to accidentally hit the lifetime allowance than you might think. After all, pensions are especially designed to make it easy for you to save!

Think about it: you’ll get tax refunded into your SIPP every now and again, thanks to that lovely tax relief we keep banging on about. Plus, you’ll have those investments working hard to grow your savings. And you’ll even be able to reinvest the profit you make from your investments (known in investing as your ‘returns’), to grow your savings even more – this snowball effect is known as compound interest.

All that means you might well be able to save more than you think – especially if you pay into your pensions regularly, start saving early and your investments do well.

Anyway, if you do end up hitting the lifetime allowance, the bad news is that you’ll end up facing a pretty hefty tax bill on any money you withdraw from your pension over the allowance. We’re talking 25% tax if you take it as income, or 55% tax if you take it as a lump sum. Gulp! Well, the good news is that it’s a nice problem to have! 

Workplace pensions

Even though you can have as many workplace pensions as you want, you can only pay into one workplace pension at a time. 

Let’s rewind for a second. 

It’s easy to end up with lots of workplace pensions. In fact, if you’ve had a few employers in your working life, the chances are you’ve racked up a few of them already. That’s because each time you change employers, your new employer will usually set you up a new workplace pension! 

The average worker in the UK changes jobs 5 times (according to AAT) – so, you’re likely to have had around 5 workplace pensions by the time you retire. This is totally fine. Like we said, you can have lots of workplace pensions – and the money in those pensions will still be ready and waiting for you when you come to retire. 

However, you can only have one active workplace pension at a time – the one your current employer has set up for you. The rest have to be dormant, meaning that you and your employer are no longer paying into them.

Unfortunately, having lots of dormant pensions lying around can make them easy to lose. It’s true! The Association of British Insurers found that there are around 1.6 million lost pension pots in the UK, worth around £19.4 billion altogether!

Why transfer your old pensions

That’s why it’s often more sensible to consolidate your pensions, which is when you start a new personal pension (like a SIPP) and then transfer your old pensions to your new one. By gathering all your old workplace pensions in one place like this, you’ll make them easier to keep track of and you’ll know exactly where your money is when you come to retire. Phew!

Consolidating your pension

Luckily, transferring a pension to a SIPP is quick and easy – check out our dedicated guide to learn how.

Over to you

As you can see, there’s no need to choose between a SIPP and a workplace pension. Instead, you can have both!

If your employer offers you a workplace pension, we’d always recommend accepting it – that way, you’ll be able to unlock free money from your employer! However, if you have extra savings left over after your workplace pension contributions, starting a personal pension – like a SIPP – is a great shout. By starting a SIPP alongside your personal pension, you’ll be able to access lower fees and a greater range of investment options, meaning you might be able to grow your money faster. 

Just remember that, traditionally, SIPPs require you to make your own investment decisions, so they’re often not great for beginners. If you’re keen to have your money looked after by experts, another kind of personal pension might be better.

No matter what you choose, boosting your savings for retirement is quick and simple – just browse our selection of the best personal pensions to get started. Then, enjoy watching your savings grow ready to live the high life in your golden years. Champagne, anyone?!

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Retire in style

Find the best personal pension for you – you could be £1,000s better off.

Best pension providers

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