Unsure whether you should have a workplace pension or a SIPP? You don’t have to choose between one or the other – it’s possible to have both.
Opting out of a workplace pension isn’t generally recommended because it means missing out on the tax benefits and employer contributions that come with it. Not only that, but you might struggle to build a substantial nest egg if you don’t pay into a scheme during your employment years.
But for those who want more control over their investments, a self-invested personal pension (SIPP) is worth considering too. You can have a SIPP alongside your workplace pension and contribute to both at the same time.
So should you continue your workplace pension, transfer to a SIPP or pay into both? We compare workplace pensions and SIPPs below to help you decide which option is right for you.
What is a workplace pension?
A workplace pension scheme is offered by employers following the automatic enrolment rules, which were first introduced in 2012.
In a nutshell, a percentage of your salary is deducted before tax and topped up by your employer. You can normally access it from the age of 55* and have the choice of a guaranteed or flexible retirement income. You make payments based on your total earnings, and your employer pays a minimum of 3% while you pay 5%.
A defined benefit pension, also known as a final salary pension, is a retirement income based on your salary and the time you have been on the scheme. While some private sector employers offer defined benefits pensions, they are far more common in the public sector.
What is a SIPP?
A self-invested personal pension (SIPP), also referred to as a personal pension, allows you to save and invest on your own terms.
You can pay up to Â£60,000 of your annual income into your SIPP, whether you choose to do this regularly or in lump sums. You benefit from increased choice, and flexibility on the amount you want to pay and when. SIPPs are registered pensions, so you qualify for tax relief and your employer can make contributions.
Knowledge of the financial markets and experience in managing investments is necessary if you want your funds to perform well â but a financial advisor can also manage it on your behalf.
A SIPP or workplace pension – which is better?
If you want freedom and flexibility, an SIPP could be better suited to you. With more options, you can choose funds that suit your goals and risk appetite â but remember that you could lose money if your investments don’t perform well.
The funds in a SIPP, like a workplace pension, are held until you reach age 55*. After that, you can withdraw this but will have to pay tax on any withdrawals over 25% of the value of your pension.
A workplace pension can mean less flexibility but you receive employee contributions, and your own contributions are added before tax.
Ultimately there are pros and cons to each, so deciding whether it’s better to have a SIPP, a workplace pension, or both, will depend on your individual circumstances.
We recommend speaking to a professional pension advisor who will be able to help you make a decision that’s right for your situation.
Can you transfer a workplace pension to a SIPP?
The simple answer is yes â you can transfer your workplace pension to a SIPP. It can make your pension easier to track, however, it’s important to know what type of pension you have, and consider any loss of benefits and fees incurred.
Transferring a defined contribution scheme into a SIPP is simple. You’ll normally contact your new provider and let them know the details of your previous pension to organise the transfer.
If you have a defined benefit pension, transferring your investments into a SIPP is generally considered to be risky because it means missing out on substantial benefits. If the transfer value is over Â£30,000, you need to get advice from a financial advisor before you go ahead.**
Can you open a SIPP if you have a workplace pension?
Yes, you can have both a SIPP and a workplace pension while contributing to both at the same time. If you are offered a workplace pension, it’s usually worth taking advantage of it because of the employer contributions and tax benefits.
If you can afford to contribute to a SIPP on top, you’ll have more investment options, which may be better-suited to your personal circumstances, financial targets and retirement plans.
How to get SIPP and workplace pension advice from an expert
Choosing between a SIPP and workplace pension is an important decision so it’s worthwhile speaking to a qualified financial advisor who can compare the two and see which is better for you. They can help you make informed decisions by offering expert and tailored advice, and help manage your pension so that you get the most out of it.
At Almond Financial, our financial advisors have extensive experience helping clients to manage their pensions and plan their retirement. Book a free 30 minute call to get started with a no-obligation chat.
*The age at which can you can access your pension is changing from 55 to 57 from 6th April 2028.
**Transferring out of a Final Salary scheme is unlikely to be in the best interests of most people