Pensions are a very confusing area of financial planning that often requires professional advice, especially SIPPs (self-invested personal pensions) and workplace pensions. Our team are frequently asked what the difference is between a SIPP and a workplace pension. So, in this guide, we look at both pensions while answering some common questions.
SIPP vs workplace pension
First, let’s look at the differences between a SIPP and a workplace pension:
SIPP – self-invested personal pension
A SIPP (self-invested personal pension) is often shortened to ‘personal pension’. This type of pension gives you more control over how you save and invest. Due to its flexibility, it can offer greater choice when compared to other pensions. Pension contributions usually come from the individual; however, there are some scenarios where employers can contribute too.
Workplace pension
Introduced in 2012 as part of the new auto-enrolment rules, the workplace pension scheme is offered by employers. A percentage of a worker’s salary is deducted before tax is applied, which is then topped up by the employer. The employer pays 3% and workers pay 5% towards their pension contributions. Payments are based on the worker’s total earnings.
One notable difference between these two pensions is that, in effect, you receive ‘free money’ from your employer with a workplace pension. As they contribute to your pension scheme, this is money you would have to provide yourself when contributing to a SIPP.
Many people have paid into a salary-sacrifice pension, which is where your official salary is lower, and the employer pays the difference into your pension. Historically, this would result in both the employer and employee paying less National Insurance. However, this exemption has recently been capped at £2,000 by the Chancellor in the Autumn Budget. Speak to our financial planning team if you have been affected by this measure.
Whether you have a SIPP or a workplace pension, you can usually only access either one when you reach the minimum pension age. At the current time, this is 55 years (rising to 57 from April 2028). There are some instances where someone might be able to access their pension sooner, such as through protected early access or due to ill health. For more information on qualifying for early pension access, please ask our team for advice.
Can you have a SIPP and a workplace pension?
Yes, you can contribute to a SIPP and a workplace pension at the same time. You could have a workplace scheme to secure employer contributions, while actively using a SIPP for more specialist investing.
Due to various tax relief benefits, it’s common for people to have both a SIPP and a workplace pension. Basic‑rate tax relief is usually given at 20% for personal pensions, which means £80 becomes £100 in your pension. Higher and additional‑rate taxpayers can claim extra tax relief (up to 40% or 45% total) through their self‑assessment tax returns.
Can you transfer a workplace pension into a SIPP?
Yes, you can transfer a workplace pension into a SIPP. However, you need to be mindful of potential fees and the loss of benefits. One advantage is that it can help to simplify tracking, but you need to understand the type of pension you have before committing to a transfer.
If you have a final salary pension (defined contribution scheme) then it can be very risky to transfer this into a SIPP. There could be a significant loss of benefits, so you must get professional financial advice before you consider transferring this type of pension.
Never transfer a pension without speaking to a regulated financial planner. As everyone’s situation is different, there are different pension strategies available. It’s important to make the right decision for your own personal circumstances.
Pension Advice in West Bridgford
Whether you have a SIPP or a workplace pension, available relief on pensions is still a tax-efficient way to save for the long term. If you’re a higher or additional rate taxpayer, then it’s important to check how the current allowances will help you plan efficiently for your future retirement. Without regular annual reviews, it’s easy to make mistakes or miss opportunities. Yearly financial check-ins keep you on track and ensure your pensions are working for you.
Our financial planners will review your pensions, and we’ll help you make the most of available opportunities, so your pensions work harder for you. We’ll explain any advantages or disadvantages of pension transfers, so you can make informed decisions. Despite recent changes in the Budget, a sensible pension strategy should still be a key part of your financial plan. Together, we will help you maximise your tax efficiency and prepare for the future.
Do you need a pension review? Get in touch with our financial planning team.
Sources:
https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief
https://www.wealthify.com/blog/sipp-vs-workplace-pension
https://www.ii.co.uk/ii-accounts/sipp/workplace-pension-vs-sipp
