Should I use an employer pension or a SIPP?

A SIPP is a pension package and one of many personal pensions in the UK. SIPPs allow you to save and invest some money for later while deciding where to invest yourself.

They are different from employer pensions. These may be defined benefit or defined contribution plans generally organized by your employer.

MoneyWeek spoke to a number of experts about the pros and cons of SIPPs and whether you should invest in a SIPP.

The advantages of SIPPs over workplace pension plans

The biggest advantage of SIPPs over workplace pension plans is their increased flexibility.

As Martin Howe FPFS, senior wealth planner at financial planning firm Sanlam Wealth, points out, SIPPs are considered more flexible than workplace pension plans.

“While an individual must contribute 5% of their eligible earnings to benefit from a 3% employer contribution, an SIPP allows an individual to vary their contributions and authorize flexible monthly contributions or ad hoc lump sums – ideal when a worker’s income can be unpredictable.”

Also, a typical company pension usually only contributes to its own scheme. However, in reality, most employees are likely to have accumulated multiple employers over the years.

Therefore, an SIPP is a convenient way to consolidate the employer pensions of former employers into a plan of their choice.

“This will ensure that they benefit from the maximum employer contributions available while not being ‘bogged down’ by the administration which has several [workplace pensions] previous jobs may involve,” says Howe.

In addition to these factors, there is a much wider range of investment options available to SIPP owners compared to workplace pension plans.

“SIPPs generally provide access to a wider range of investment options, for example, direct company shares and commercial property and land. This gives you more control over the investments within your pension,” says Louise Rycroft, financial consultant at Timothy James and Partners, an independent financial advisory firm.

Disadvantages of SIPPs vs Workplace Pension Plans

One of the major disadvantages of choosing SIPPs over workplace pension plans is the fact that the former are generally not compatible with wage sacrifice plans.

“Some employers may offer a wage sacrifice scheme where pension contributions result in National Insurance savings for both employee and employer which is not available when saving for retirement through a SIPP “, notes Howe.

Salary sacrifice occurs when you voluntarily give up part of your salary each month to obtain a non-monetary benefit from your employer. This is a tax-efficient way to contribute to pension plans.

As your monthly income decreases if you opt for wage sacrifice, the amount of tax and national insurance you pay also decreases.

SIPP products also typically have higher investment and account management costs. Some employers can even “subsidize the costs of career guidance or advice where needed, such as agreeing on the most appropriate method of taking retirement benefits,” with workplace plans, Howe says. . With higher fixed costs, SIPPs can also be less profitable for smaller retirement pots.

Should you invest in an SIPP alongside a company pension?

It’s common for people to think they can only invest in an employer or other pension plan, but the good news is that investing in an employer pension plan doesn’t prevent you from opening an SIPP. .

“There are no restrictions on investing in one or more SIPPs alongside one or more workplace pensions apart from tax charges if the overall pension contributions exceed the annual allowances which vary between £3,600 and £40,000 in a tax year based on income,” Howe says.

But while that’s allowed, whether you should ultimately “depends on the individual investor’s circumstances, as well as their investment experience,” says Richard Gardner, market expert at Modulus.

“Investors can start withdrawing (RSPP) at age 55, which could help a lot through this inflationary period,” he adds.

And Rycroft points out that although rare, sometimes your employer can even contribute directly to your SIPP if you ask them to.

“If you are over 55, you can potentially start earning income from your SIPP. An SIPP may offer greater withdrawal options compared to your workplace pension plan. This can be useful if you need to manage your sources of income to be as tax efficient as possible,” she adds.

Employees should first make sure they “get the maximum employer pension contributions available to them to the extent possible,” says Howe.

This is also the direction taken up by Steve Webb, a former UK pensions minister and now a partner at consultancy firm Lane, Clark & ​​Peacock.

“Someone can pay £800 a year from their take home pay into a work pension. Assuming they pay tax at the basic rate, HM Revenue and Customs (HMRC) will top this by adding £200, while their employer will add a further £600. In other words, something that costs you £800 ends up at £1,600 in your pension. If you unsubscribe, you save £800 a year, but your pension ends up dropping by £1,600 a year. It’s not a good choice if you have other options for saving money,” says Webb in The Money Edit, MoneyWeek’s sister publication.

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