SIPP vs personal pension
Pages contents:
- What is a personal pension?
- What is a SIPP?
- SIPPs vs personal pensions
- SIPP vs personal pension - which is cheaper?
- SIPP vs personal pension - which is easier to run?
- SIPP vs personal pension - which will give me a bigger pension?
- Should I have a SIPP or a personal pension?
- Can I transfer a personal pension to a SIPP, or vice versa?
- Can I get help to decide between a SIPP and a personal pension?
Taking out a pension is a great way to save for your future, especially as tax relief can boost your contributions. But, with several different types of pension available, understanding how they differ will help you pick the one that is right for you.
Here, we explain how traditional personal pensions and SIPPs stack up.
What is a personal pension?
A personal pension is any pension that you arrange yourself rather than through your workplace. They are also known as defined contribution or money purchase pensions as the amount you receive is based on how much you pay in and the growth of the underlying investments.
Any contributions you make to your pension are topped up with tax relief, subject to the annual allowance. Once you reach age 55 (57 from 2028) you can access your pension, taking up to 25% of it tax-free (subject to a maximum of £268,275).
What is a SIPP?
A SIPP is a type of personal pension, following exactly the same rules outlined above. But, where the money you contribute to a traditional personal pension is usually invested in a range of funds, you have much more investment choice and flexibility with a SIPP. Hence the name – self-invested personal pension.
You can choose to invest in a wide range of investments including funds, shares, gilts and, in some cases, even commercial property.
SIPPs vs personal pensions
The similarities and the differences between SIPPs and personal pensions.
Personal pension | SIPP |
Defined contribution scheme so the value of your pension depends on how much you pay in and the growth of the underlying investments. | |
Tax relief on contributions up to the annual allowance, which is the lower of £60,000 or 100% of your earnings. | |
Up to 25% can be taken tax-free (subject to a maximum of £268,275) when you reach 55 (57 from 2028). | |
You choose from a range of funds offered by your pension provider. | You are free to select from a wide range of investments including funds, shares, gilts and, if your provider offers it, even commercial property. |
SIPP vs personal pension - which is cheaper?
The answer to that one used to be easy as SIPPs tended to be more expensive than the simpler personal pension. However, over the years, charges have dropped on SIPPs and can even work out more cost-effective if you have a large pension fund.
When comparing SIPPs and personal pensions, you are likely to see different charges.
On a personal pension, you will usually be charged an annual management fee, which is a percentage of your pensions value, plus switching charges if you want to change the funds you invest in.
SIPP charges vary between providers and could include set-up charges, platform charges, annual administration charges and dealing fees for investing. How much you end up paying will come down to how you want to run your SIPP, so make sure you compare costs before picking a provider.
Ultimately, if you would like the investment choice and flexibility offered by a SIPP, you will probably be happy to pay a little more for it.
SIPP vs personal pension - which is easier to run?
The more limited investment choices mean a personal pension is probably easier to run, but you could adopt a hands-off approach with a SIPP if you wanted. Rather than track your SIPP investments yourself, trading in and out of shares, you could select funds or even hire an investment manager to look after your portfolio for you.
However, one of the key reasons people take out SIPPs is for the investment choices they offer. Being able to select from a really broad investment universe, even adding in more unusual investments such as farmland and prisons, makes saving for retirement that bit more interesting and exciting.
SIPP vs personal pension - which will give me a bigger pension?
Absolutely impossible to say. Investing in individual shares is potentially higher risk than putting your money into a well-diversified fund through a personal pension. But that risk can deliver higher returns as well as larger losses.
Charges can also nibble away at performance, with SIPPs offering a greater opportunity to rack up higher fees. However, if those fees get you better performance, then they are worth paying for.
Should I have a SIPP or a personal pension?
The choice is entirely up to you but we do find that the investment flexibility offered by SIPPs means they are more suited to someone who is interested or experienced in selecting their own investments.
A personal pension can be a good option if you are starting out on your investment journey or you do not want the responsibility of making these choices.
Can I transfer a personal pension to a SIPP, or vice versa?
If you pick the wrong type of pension or your approach to investing for the future changes, it is not an issue. It is easy to transfer a personal pension to a SIPP if you want the additional investment choice and flexibility. Or move a SIPP to a personal pension if you find you do not need all the options.
Simply contact your new pension provider and they will be able to arrange the transfer on your behalf.
Can I get help to decide between a SIPP and a personal pension?
Having the right pension can make a difference to the way you feel about saving for your future. If you want help deciding between a SIPP and a personal pension, we recommend seeking professional financial advice. An independent financial adviser will be able to assess your circumstances and recommend the most appropriate pension for you.
How can Pension Wise help?
If you have a defined contribution pension scheme and are 50 or over, then you can access free, impartial guidance on your pension options by booking a face to face or telephone appointment with Pension Wise, a service from MoneyHelper.
If you are under 50, you can still access free, impartial help and information about your pensions from MoneyHelper.
Learn more about our SIPP
Learn how to make the most out of your SIPP with our useful guides.
Important information: A SIPP is for those wanting to make their own investment decisions when saving for retirement. As investment values can go down as well as up, the amount you retire with could be worth less than you invested. Usually, you won’t be able to withdraw your money until age 55 (57 from 2028). Before transferring your pension, check if you’ll be charged any exit fees and make sure you don't lose any valuable benefits such as, guaranteed annuity rates, lower protected pension age or matching employer contributions. If you’re unsure about opening a SIPP or transferring your pension(s), please speak to an authorised financial adviser.