SIPPs and workplace pensions – What’s the difference?

When it comes to saving for your retirement, pensions are a tax efficient way to build towards your future goals. Aside from the State Pension, most people will come across two types of pensions in their life, SIPPs and workplace pensions. Knowing the difference between the two can help you plan for your financial future in a way that is most effective for you and your needs later in life. Here we will explore the difference between SIPPs and Workplace Pensions and what this might mean for you.

What are workplace pensions?

Current legislation stipulates that every employer must enroll any eligible employees on a workplace pension scheme.

Your employer will then ringfence a portion of your salary which will be invested in a pension. The employer will also contribute to your pension pot whilst also claiming tax relief on your pension contributions adding more to your pension. Workplace pensions are an efficient way of saving for your retirement as you are earning.

You can opt-out of a workplace pension scheme at any time. Depending on the scheme rules, your employer may also stop paying into your pension if you do.

Most workplace pension schemes are Defined Contributions (DC) schemes. This means the amount you receive in retirement is directly linked to how much you have contributed to your pension throughout your working life.  DC schemes are also investment products meaning the amount you contribute will be invested and what you receive in retirement will be dependent on the fund performance.

There is another type of workplace pension scheme that exists called Defined Benefit schemes. These are now quite rare as they are costly for employers to run. Some public sector institutions still run these kinds of schemes such as the NHS or the Civil Service. They differ from DC schemes in that the amount you receive in retirement is linked to your salary (either your salary when you hit retirement or an average of your salary whilst working in the organisation).

In modern working life, people often move between companies. As they do, they are auto-enrolled on a new pension scheme each time (unless they opt out or the employer will contribute to a pre-existing scheme). This means that employees often have multiple pension pots, some of which they have forgotten about. The good news is, it is possible to find and then consolidate these pots in a private pension scheme such as iSIPP, in a process known as Pension Consolidation.

What is a SIPP?

SIPP stands for Self-Invested Personal Pension and as the name suggests, this kind of pension is set up by you. Like a workplace pension scheme, SIPPs are an efficient way to save for your retirement, the difference being you get a lot more say in how and where your money is invested. Again, SIPPs are Defined Contribution pensions. This means that what you receive depends on how much you have paid in and how well your investments have performed. Just like a workplace scheme the pension provider will claim tax relief on your contributions and add this to your savings. It is your choice how much you pay into a SIPP, although many providers do have minimum amounts you must contribute.

Can I have a SIPP and a workplace pension?

Yes! You can have both a workplace pension and a SIPP. You can also have as many SIPPs as you like. Although in both circumstances, there is an annual personal allowance for contributions. In most circumstances, you can currently contribute up to £40,000 in one tax year. If you have more than one pension this amount will be spread across all of them. So if you had already paid £30,000 in one pension, you would only be able to contribute £10,000 in the other. It is possible to contribute more than this amount, however, tax charges will apply. There are slightly different rules if you are a higher earner under a system called Tapered Annual Allowance. You can find out more about the Annual Allowance as well as any other pension related information at MoneyHelper the government backed resource for impartial financial information.

Can I transfer my workplace pension to a SIPP?

It is possible to transfer your workplace pension to a SIPP. However, you should research the benefits you would lose if you did. Your employer may not continue to contribute to your pension if you do decide to transfer to a SIPP. If your workplace pension is a Defined Benefits scheme, the FCA currently advise that in most cases you would be worse off transferring your Defined Benefits pension to a Defined Contribution scheme.  At this stage, iSIPP does not currently accept employer contributions.

Can iSIPP help me consolidate my old pension pots?

At iSIPP, you can consolidate your old pension pots into one easy to manage SIPP. With a wide range of funds available, you can put control back into your hands when it comes to your financial future. Our funds are managed by leading houses Blackrock or Schroders, providing you with peace of mind that your investment is in knowledgeable hands. Plus, you get 24/7 access to your online account so you can keep track of how well your investments are performing.

Enjoy reading this blog? 

Why not try reading one of our other blogs on pension consolidation:

The benefits of starting your pension early

How big a pension do you need to retire? 

Or visit our pension consolidation page here. 

Disclaimer 

The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.