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SIPP vs Personal Pension

Choosing between a standard personal pension and a self-invested personal pension (SIPP) is an important decision to make if you’re searching for the most suitable way to save and invest for retirement.

In my guide, I cover all the key differences you need to know between SIPP vs personal pension.

Also consider: My guide on the Best SIPP Provider UK

Key takeaways

  • The main difference between a SIPP and a personal pension is that you can select your own investments in a SIPP, whereas in a personal pension, these will typically be chosen for you by your pension provider.
  • You choose the assets that your retirement funds are invested in when using a SIPP, giving you a greater level of control over your savings. This can include specialist investment options, such as commercial property.
  • Both types of pensions come with tax-efficient benefits, including Income Tax relief on contributions up to the Annual Allowance and no Income Tax or Capital Gains Tax (CGT) to pay on interest or investment returns generated.

What is a personal pension?

To understand the difference between SIPPs and other personal pensions, it’s first important to understand how a personal pension works.

In a personal pension, you make cash contributions to your fund. This can be in the form of lump sums or regular monthly contributions.

Your money is then invested for you by the pension provider you hold the fund with, aiming to grow your savings over time so that you have a larger fund to withdraw money from in retirement. Interest and investment returns are generated free from Income Tax and Capital Gains Tax (CGT).

A personal pension is typically a private pension, meaning you start it in your name rather than being auto-enrolled into it like you are with a workplace scheme.

Even so, you can ask your employer to contribute to your personal pension rather than the workplace pension that you may have with them.

A standard personal pension is typically a defined contribution (DC) scheme. This means that, unlike a defined benefit scheme where you’ll be paid a guaranteed income based on factors such as years of service at a company, the amount of retirement income you’ll have available in your DC pot will be determined by how much is in it when you come to retire.

This includes your own pension contributions as well as any employer contributions, investment returns, and tax relief – find out more below.

Pension tax relief

Like most pensions, personal pensions benefit from Income Tax relief. This means the government adds money to your pot when you make contributions.

You’ll receive tax relief on your contributions at your marginal rate of Income Tax. This means that a £1,000 pension contribution essentially “costs”:

  • £800 for basic-rate taxpayers
  • £600 for higher-rate taxpayers
  • £550 for additional-rate taxpayers.

Basic-rate tax relief is usually applied automatically, and you’ll typically need to claim higher- or additional-rate relief through a self-assessment tax return.

Bear in mind that you can only receive higher- or additional-rate relief on income that falls in that tax band.

Tax benefits limits

As with all types of pensions, there are limits to the tax benefits you can receive from your personal pension. There are two limits to be aware of: the Annual Allowance and the Lifetime Allowance.

Annual Allowance

Each tax year, you can make pension contributions and receive tax relief up to the Annual Allowance. In 2022/23, this stands at £40,000 or 100% of your earnings, whichever is lower and counts across all pensions you hold including the state pension.

This threshold includes all contributions and tax relief. So for example, if you’re a basic-rate taxpayer and contribute £32,000 to your pension in a single tax year, you’ll receive £8,000 in tax relief. You can continue making contributions above this limit, but they will not be eligible for tax relief.

Lifetime Allowance

There is also a limit for how much you can tax-efficiently contribute to your pensions throughout your lifetime. This is known as the “Lifetime Allowance” (LTA) and, in 2022/23, this currently stands at £1,073,100 where it will remain frozen until 2028.

All the money in your pension counts towards your LTA, including your and your employer’s contributions, tax relief, and any investment returns your fund generates.

If you exceed the LTA, you’ll likely have to pay tax on the excess when you withdraw money from your pension plan. This is typically:

  • 55% on lump sums
  • 25% on income, on top of your marginal rate of Income Tax.

Again, you can continue contributing money to your pot above this limit, but you will likely face one of these tax charges if you do.

Pension withdrawal rules

As a pension is designed specifically for you to build retirement savings in, you typically can’t access it until you reach the normal minimum pension age (NMPA). In 2022/23, this is age 55, although this is set to rise to 57 in 2028.

At this stage, you’ll be able to start accessing your personal pension. Under the current rules, you can take the first 25% of your fund as a tax-free lump sum. After this threshold, any money you withdraw will be subject to Income Tax at your marginal rate.

You also have other options for accessing your personal pension, such as purchasing an annuity with your funds, giving you a guaranteed income.

What are the advantages of personal pensions?

  • A tax-efficient way to build savings

Contributions up to the Annual Allowance will benefit from tax relief and your money can generate interest and returns free from Income Tax and CGT, making personal pensions a tax-efficient way to save for retirement.

  • Investment decisions made for you

The pension company you hold your personal pension with will make investment decisions with your funds. This removes the stress of having to do this yourself and means you don’t need knowledge of the markets.

What are the disadvantages of personal pensions?

  • Limited flexibility in how your money is invested

As the scheme will invest your money for you, you’ll likely have little say in how this is done, aside from perhaps choosing a level of risk you’re willing to take on.

  • Your money will be tied up until you retire

As a pension is specifically designed for building retirement savings, you generally won’t be able to access your fund until the NMPA of 55 (rising to 57 in 2028).

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What is a self-invested personal pension (SIPP)?

Now that you have seen how regular personal pensions work, understanding a self-invested personal pension (SIPP) will be far easier.

Self-invested personal pensions (SIPPs) are a type of personal pension, except that you are responsible for making the investment decisions – hence the “self-invested” part of the name.

That means you’ll have far more control over how your money is invested, giving you the scope to put your own investment strategy into place with your retirement savings.

Broadly, a SIPP works in the same way as other personal pensions:

  • They are also defined contribution pensions, meaning what you put in across contributions, tax relief, and any investment returns generated will be what you can draw from in retirement.
  • You still receive tax relief on your contributions up to the Annual Allowance.
  • The money in a SIPP will count towards your Lifetime Allowance.
  • SIPP investments can generate interest or returns free from Income Tax and CGT.
  • Other than in exceptional circumstances, you won’t be able to access your funds before the NMPA (currently 55 in 2022/23, rising to 57 in 2028).

Choosing a SIPP provider

If you want to start saving into a SIPP, you’ll need to choose a provider. There are many SIPP providers in the UK to choose from, with some of the top ones including:

Choosing a type of SIPP

There are also various types of SIPPs for you to choose from. The list below contains some of the main kinds of self-invested pension plans that you might have access to:

  • Full SIPP – offer a wide range of investment choice, and may even come with investment support from your provider.
  • Low-cost SIPP – generally charge a lower platform fee or dealing commission, but offer a smaller range of investment options.
  • Ready-made SIPP – your provider selects the investments on your behalf like in other personal pensions.

What are the advantages of SIPPs?

  • Choose your own investments

You can generally hold a wide range of investments in a SIPP, including but not limited to:

  • Stocks and shares
  • Corporate and government bonds
  • Collective investments, such as investment trusts and funds
  • Open-ended investment companies (OEICs)

This can also include specific investments, such as commercial property, that a personal or workplace pension scheme may not have access to.

This gives you greater control over your investment funds within your pension pot.

  • Can still benefit from employer contributions

In a workplace pension, your employer contributes money to your pension pot. But if you decide that you’d rather use a SIPP and make your own investments, you can actually ask your employer to make their payments into this pot instead.

What are the disadvantages of SIPPs?

  • You’ll need to understand financial markets

While having a wider range of investment options is a benefit, it also means that you’ll need to understand and be comfortable navigating financial markets.

You’ll ideally need to spend time researching other investments to choose which ones are most suitable for you.

  • Potentially higher charges to pay

SIPP providers will generally charge a fee for administering your pension. These are often higher than the fees you might face for other personal pensions.

Some providers might charge a flat fee, while others may use percentage-based fees.

Should I move my pension to a SIPP?

If you have existing pensions, whether that’s a workplace or private pension, you can generally arrange to transfer these into your SIPP.

Of course, the question of whether you should do this is deeply personal and will depend on a variety of factors. You might want full control over the way your money is invested, so moving your existing pensions to a SIPP may suit you.

Equally, as you can hold multiple pension pots, you may prefer to keep these where they are and then start making regular payments into a SIPP alongside these. If you decide to do this, remember that all pensions you hold count towards the pension Annual Allowance and LTA.

It may be worth taking advice from an authorised financial adviser before you decide to move your retirement savings.

Is a SIPP better than a personal pension?

Ultimately, the question of whether a SIPP is better than a personal pension comes down to your personal circumstances and preferences.

If you’re a confident investor and you want greater control over how your pension funds are managed, a SIPP could be a sensible choice for you.

But remember: you’ll be entirely responsible for the investment management of money invested in your SIPP, so you need to be sure that you fully understand markets and the assets you’re invested in.

Otherwise, you could risk losing value on your pension savings, which in turn could reduce your retirement income in future and impact the kind of lifestyle you’re able to live in retirement.

So, if you’d rather leave these decisions to an expert, you may prefer to choose a standard personal pension instead or seek the help of a regulated financial adviser.

Get a FREE Pension Review

Get a free no obligation pension review today from a qualified financial adviser.
Our partner Unbiased will connect you with one of over 27,000 FCA-regulated advisers.

SIPP vs personal pension FAQs

What is the difference between SIPPs and personal pensions?

The difference between SIPPs and personal pensions is that you can choose how your money is invested in a SIPP, whereas this will be decided by your pension scheme in most other personal pensions.

Is it worth having a SIPP?

Yes, it may be worth having a SIPP if you understand financial markets and are confident about choosing your own investments. However, if you are less sure of this, choosing a scheme that makes investments on your behalf may be preferable.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

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