Should I use a workplace pension or a SIPP?

SIPPs vs workplace pensions: which is the right way to save for retirement for you?

Woman using calculator at laptop
(Image credit: © Getty images)

When it comes to saving for retirement, deciding whether to go for a workplace pension or a SIPP is an important consideration.

After all, while both allow you to build a pension pot for your retirement, SIPPs and workplace pensions work in different ways, which can impact the amount of money you have to play with when you finish work.

We compare the two to help you decide on the best option.

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Workplace pension vs SIPP: what are they?

First of all it’s worth understanding what each of these forms of pension are.

Workplace pensions have become commonplace since the auto enrolment scheme was introduced back in 2012, with employers required to open a pension for eligible staff and contribute towards it.

Some employers run a different type of workplace pension, called a defined benefit, where the pension you eventually receive is based on the number of years you have worked with the business, though these are increasingly rare. Instead workplace pensions tend to work on a defined contribution basis, where the money you save is invested into the stock market, with the size of your pot dependent on how those investments perform.

Generally the pension firm operating your workplace pension will allow you to choose from a handful of different investment routes ‒ for example how much risk you are comfortable with ‒ but you have no say over where the money is invested.

A self-invested personal pension (SIPP) is a little different, in that you are one making the investment calls. With a SIPP you can determine precisely which stocks, shares, funds and the like to invest your retirement money into, rather than relying on a fund manager from an investment firm.

So how do you work out which form of retirement saving is right for you? MoneyWeek has picked the brains of a host of pension experts to help you decide between a workplace pension and SIPP for your pension plans.

SIPPs vs workplace pensions: the pros of SIPPs

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.”

SIPPs can also be a handy way to consolidate a handful of different pensions that you may have accrued over your career into a single pension.

“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 often a much wider range of investment options available to SIPP owners compared with 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.

SIPPS vs workplace pensions: the cons of SIPPs

The biggest downside to saving in a SIPP rather than a workplace pension is undoubtedly the fact that you miss out on contributions from your employer.

With a workplace pension, so long as you are eligible, your employer will need to pay into your pension pot alongside your own payments. It is essentially free money from your boss, which can help you build a larger pension pot and enjoy a more comfortable retirement.

If you opt out of a workplace pension, and instead choose to save in a SIPP, then you will almost certainly be giving up those contributions.

A related drawback of choosing SIPPs over workplace pensions is the fact that SIPPS 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.

SIPPS vs workplace pensions: should you invest in both?

It is common for people to think that they can only invest in a single pension, 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 the annual allowances,” says Howe.

Currently pension savers can save up to £60,000 per year into their pensions.

But while it is possible to have both a workplace pension and a SIPP, whether you ultimately should have both “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 from 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 guidance is echoed by Sir 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.

John Fitzsimons

John Fitzsimons has been writing about finance since 2007, and is a former editor of Mortgage Solutions and loveMONEY. Since going freelance in 2016 he has written for publications including The Sunday Times, The Mirror, The Sun, The Daily Mail and Forbes, and is committed to helping readers make more informed decisions about their money.