Should I use a workplace pension or a SIPP?

Workplace pensions and SIPPs both have attractive qualities, but which one will produce the best returns of investors?

A SIPP is a pension wrapper and one of many personal pensions in the UK. SIPPs pave the way for you to save and invest a pot of money for later life while deciding where to invest yourself. 

They are different from workplace pensions. These can be defined-benefit or defined-contribution schemes generally arranged by your employer. 

MoneyWeek spoke to a number of experts about the advantages and disadvantages of SIPPs and whether you should invest in a SIPP.

The advantages of SIPPs compared to workplace pensions

The biggest advantage of SIPPs over workplace pensions is added flexibility. 

As Martin Howe FPFS, senior wealth planner at financial planning firm Sanlam Wealth, points out, SIPPs are considered to be more flexible compared to workplace pensions.

”While an individual must contribute 5% of their Qualifying Earnings to benefit from a 3% Employer contribution, a SIPP allows an individual to vary their contributions and allow flexible monthly contributions or ad-hoc lump sums - ideal where a worker’s income may be unpredictable.”

Also, a typical workplace pension typically only makes contributions to their own scheme. However, in reality, most employees are likely to have accrued multiple employers over the years. 

Therefore a SIPP is a handy way to consolidate workplace pensions from previous employers into a scheme of their choice. 

“This will ensure that they benefit from the maximum available employer’s contributions whilst not becoming ‘bogged down’ by the administration that having multiple [workplace pensions] from previous employments can involve,” says Howe. 

On top of these factors, there’s a much wider range of investment options available to SIPP owners compared to workplace pension schemes. 

“SIPPs generally provide access to a wider range of investment options, for example, direct company shares and commercial property and land. This gives you more control over the investments within your pension,” says Louise Rycroft, financial consultant at Timothy James and Partners, an independent financial advice firm.

The disadvantages of SIPPs compared to workplace pensions 

One of the largest drawbacks of choosing SIPPs over workplace pensions is the fact that the former are generally not compatible with salary sacrifice schemes

“Some employers may offer a salary sacrifice scheme where pension contributions result in National Insurance savings for both employee and employer which is not available when saving for retirement via a SIPP,” Howe notes. 

Salary sacrifice occurs when you willingly give up a portion of your salary each month to obtain a non-cash benefit from your employer, and is a tax-efficient way to contribute to pension schemes. 

While your monthly income falls if you opt for salary sacrifice, the amount of tax and national insurance you pay also falls. 

SIPP products also usually have higher investment and account management costs. Some employers may even “subsidise the costs of professional guidance or advice when required, such as agreeing the most suitable method of taking pension benefits at retirement,” with workplace schemes, Howe says. With higher fixed costs, SIPPs may also be less cost-effective for smaller pension pots. 

Should you invest in a SIPP alongside a workplace pension?

It is common for people to think that they can only invest in a workplace pension or another, but the good news is investing in a workplace pension doesn’t prevent you from opening a SIPP. 

“There are no restrictions in investing into one or more SIPPs alongside one or more Workplace Pensions aside from tax charges if overall pension contributions exceed Annual Allowances which vary between £3,600 to £40,000 in a tax-year depending on earnings,” says Howe. 

But while it is allowed, whether you ultimately should “depends on the situation of the individual investor, as well as their experience in investments,” says Richard Gardner, markets expert at Modulus. 

“Investors can begin to withdraw (SIPPs) at 55 years old, which could help many through this inflationary period,” he adds. 

And Rycroft points out that although rare, sometimes your employer may even contribute directly to your SIPP if you ask them to. 

“If you are over age 55, you can potentially start to draw an income from your SIPP. A SIPP may provide greater drawing options versus your workplace pension. This can be useful if you need to manage your income sources to be as tax efficient as possible,” she adds. 

Employees should in the first instance ensure they “benefit from the maximum employer pension contributions available to them wherever possible to do so, says Howe.

This is also the guidance echoed by Steve Webb, a former UK pensions minister and now a partner at consultancy Lane, Clark & Peacock. 

“Someone may be paying £800 per year out of their take-home pay into a workplace pension. Assuming they pay tax at the basic rate, HM Revenue and Customs (HMRC) will top this up by adding £200, whilst their employer will add another £600. In other words, something which costs you £800 ends up as £1,600 in your pension. If you opt out, you save the £800 per year, but your pension ends up £1,600 per year lower. This is not a great choice if you have other options for saving money,” says Webb in The Money Edit, MoneyWeek’s sister publication. 

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