SIPPs vs personal pension

The main differences between SIPPs and standard personal pensions are investment choice and price. Here's what you need to know.

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If you’re looking to put money into a pension in addition to your state pension or workplace pension, or if you don’t have access to a workplace pension at all, you may (understandably) be baffled by industry jargon such as “SIPP”, “robo advisor pension”, and even “personal pension”. This guide cuts through the waffle to explain the differences (and the similarities), and help you understand whether a SIPP vs a personal pension is right for you.

What is a personal pension?

A standard personal (or private) pension is a pension that you set up yourself, separately from any workplace pension and your state pension. You choose the scheme, plus how much and how often you contribute. All personal pensions are defined contribution schemes, where your contributions are invested, and your eventual pot value will depend on the performance of those investments. You can usually choose a broad plan for the scheme (how much risk you want to take, for example). The pension provider is responsible for investing your money in line with this plan.

What is a SIPP?

SIPPs, or “self-invested personal pensions”, are a type of personal pension. But they operate in a slightly different way from traditional personal pensions. Unlike regular personal pensions, with SIPPs you are responsible for managing the investments yourself. You can choose exactly where your money is invested and how much of your pot you put into each investment. You are responsible for deciding on the investment strategy you want to use for your SIPP investments, and for buying and selling assets in accordance with that strategy.

How are SIPPs different from regular personal pensions?

SIPPs and standard personal pensions are similar in many ways, but there are some important differences that could influence which one is best for you.

Similarities between SIPPs and standard personal pensions

Both types:

  • Let you choose the pension provider you use to administer your scheme (unlike workplace pensions, where the provider is usually chosen by your employer).
  • Allow flexibility over how much, and how often, you contribute (though some providers have minimum contribution levels).
  • Are defined contribution pensions, where your money is invested and your pot when you retire is dependent on investment growth.
  • Benefit from tax relief on pension contributions up to £60,000 per year (or the equivalent of your annual salary, if that’s lower).
  • Give you access to a pot when you retire, that you can use to buy an annuity, go into pension drawdown, or take out lump sums.

Differences between SIPPs and standard personal pensions

SIPPsPersonal pensions
Who manages the scheme?You, rather than the pension manager, are responsible for managing your investments. You can also hire an investment manager to do it for you.You can often choose the broad investment approach, but the specifics of your investments are managed by the pension provider.
Investment choiceChoose your own investments. You can choose from a much larger range of investments than you can with a personal pension, often including more sophisticated and higher-risk options.Typically, the pension provider will invest in a selection of funds and other investments that broadly match the investment strategy you are looking for.
How much does it cost?Charges are typically higher than standard personal pensions, because of the extra flexibility SIPPs deliver.Different funds charge different amounts, but fees tend to be lower than for SIPPs.
Who is it best for?Suitable for you if you’re more experienced in investing and know how to make investment decisions. May also be better for those with larger pots, due to the higher fees involved.Suitable for those with less experience in investing, or who don’t have the time to dedicate to close management. May be better for those with relatively small amounts to save.
Find out moreBest SIPPsBest personal pensions

Do SIPPs cost the same as standard personal pensions?

The quick answer is that SIPPs tend to be more expensive than personal pensions, because of the extra flexibility they offer.

The longer answer is that SIPPs tend to be more expensive than personal pensions, but the gap isn’t as big as it once was. Some of it is down to the type of SIPP you choose (you can read more about the different types in our full SIPP guide). If you opt for a full SIPP, which gives you the widest possible range of investment types plus personal support and advice from a team of experts, you can expect to pay pretty high fees. That’s partly because of the administration involved in the more bespoke investments full SIPPs tend to offer, such as commercial property.

Full SIPPs used to be the only option, but over recent years a number of new platforms have started offering what’s often referred to as “DIY SIPPs”. These lower-cost options, offered by the likes of AJ Bell, Hargreaves Lansdown and Interactive Investor, often have annual platform fees that are competitive with those charged by standard personal pension providers. While there will be online guidance and tools to help you, you’re pretty much left to your own devices. The range of investments may not be as sophisticated or wide-spanning as with full SIPPs.

However, even these low-cost SIPPs tend to work out more expensive than regular personal pensions in practice. That’s because SIPPs tend to be more actively managed (meaning that you buy and sell assets more frequently). While some SIPP providers include trading fees in their annual platform fees, others will charge a fee for every trade. This may be a percentage or a fixed charge. If you trade frequently, these fees can soon add up. Fixed fees in particular can eat into the value of a relatively small pension pot. In theory, managing your account more actively will allow the potential for higher investment growth, but as we all know, the value of investments can go down as well as up. So there’s no guarantee.

Do SIPPs and personal pensions both require the same contributions?

Unlike workplace pensions, where your regular monthly contributions are set by your employer as a proportion of your gross salary (5% is typical), both SIPPs and personal pensions allow you to contribute more flexibly. Usually, you can choose to contribute a regular monthly amount, ad hoc lump sums, or a combination of both. Some schemes may require you to make a minimum monthly or annual contribution, so if you’re not sure you will be able to afford this (perhaps because your income is inconsistent), look out for a scheme with low or no minimum requirements.

That said, SIPPs do tend to be more suitable for those with bigger pots, or those who are able to make higher contributions, due to the typically higher (and sometimes fixed) costs involved. If you only have a small amount to save, these higher costs can outweigh the benefits of increased flexibility.

Will a SIPP or a personal pension allow me to retire with a higher fund?

Unless you have a crystal ball and moonlight as Mystic Meg, sadly there’s no way of knowing for sure.

In theory, a SIPP has the potential for higher returns than a personal pension. That’s due to the more active management involved (if you spot a good investment opportunity, you can seize it) and the wider range of higher-risk investments available. With higher risk comes the chance for higher reward, but also the chance of more significant losses.

And, of course, you also need to take account of the likely higher charges you’ll pay with a SIPP.

In short, while a combination of skilful investing and a bit of luck could potentially let you retire with a higher fund if you put your money into a SIPP, the typically lower risk (though not no-risk) investment strategy of most personal pensions could work out better in the long run.

Can I transfer from a SIPP to a personal pension (and vice versa)?

Yes. You can transfer a standard personal pension into a SIPP, or a SIPP into a standard personal pension. This could be just because you decided your original choice is no longer right for you. Perhaps you have a personal pension, and want the flexibility that a SIPP offers. Or you may have a SIPP, but not have the time to manage it effectively. Or, it could be because (for whatever reason) you have built up several pension pots that you want to consolidate into a single pension scheme.

If you’re thinking of transferring either type of pension, check for any transfer charges that might erode the value of making the switch.

Are there any differences in tax relief between SIPPs and personal pensions?

Nope, not a sausage. Both types of scheme benefit from the same tax relief on contributions. With most schemes, what this means in practice is that every contribution you make will be topped up to account for the 20% basic rate tax most people pay on their income. So a £40 contribution will become £50, for example. If you’re a higher rate taxpayer, you can claim the additional tax back from HMRC. This can be via a tax return, if you complete one. If not, you can claim directly.

How can I withdraw money from a SIPP vs personal pension?

As with tax relief, there’s no difference in how you can access the money in a SIPP vs a standard personal pension. Both types of scheme are defined contribution pensions, with which you’ll end up with a pot of money intended to be used to fund retirement.

You can start to access defined contribution pots from age 55, or at any point thereafter (not before, unless you have medical grounds for early retirement). You can take 25% as a tax-free lump sum; the rest is subject to income tax. There are several ways in which you can withdraw the money: all at once, via lump sums, through pension income drawdown, or by buying an annuity. You can find out more about these in our full guide to defined contribution pensions.

Is there a middle ground between a SIPP and a personal pension?

Zoe Stabler

Finder expert Zoe Stabler answers

If you’re daunted by the complexity and significant effort required by a SIPP, but want to have a bit more control over your pension investments than a traditional personal pension allows, you might want to take a look at robo-advisor SIPPs.

Offered by relatively new challenger pension providers, such as Evestor, Nutmeg and Wealthify, you’ll typically be asked a series of questions about your goals, appetite for risk and investment preferences. A “robo-advisor” (essentially a clever, automated algorithm) will allocate you a suitable portfolio of investments and manage them on your behalf.

They can be a good half-way house between a SIPP and a standard personal pension. They are often more expensive than low-cost DIY SIPPs though (and almost certainly pricier than regular personal pensions). And, despite the name, they’re not a substitute for personalised advice from a regulated financial adviser.

What are the pros and cons of regular personal pensions?

Pros

  • Charges are usually lower than for self-invested personal pensions.
  • Typically more suitable for those without investment experience, who prefer to hand over investment management to their pension provider.
  • Investment risk tends to be lower than SIPPs. Slower, more steady growth can sometimes win out in the end.

Cons

  • No investments are risk-free. If the provider makes a bad choice, or the market falls at the wrong time, you could still lose money.
  • Little control over where your money is invested, though many providers let you choose a broad investment approach.
  • Some traditional personal pensions have higher charges than others. It’s worth checking, and switching to another provider if yours is expensive.

What are the pros and cons of SIPPs?

Pros

  • Flexibility over when and how much you put into your pension, and where the money is invested.
  • Likely to suit experienced investors that want control over their pension, and access to a wider choice of investments.
  • Investment support or advice available via robo-advisor or full SIPPs.

Cons

  • Typically cost more than standard personal pensions.
  • The risks may be higher than pensions that are managed by the provider.
  • If you invest without regulated financial advice, you won’t be able to complain if you make unsuitable choices.

Bottom line

There’s no categorical answer to whether SIPPs or personal pensions are “best”. It’s all down to your personal circumstances and preferences. Plus, what’s right for you at one stage in your life might not be the right choice further down the line. Use the information in this guide to help you decide what’s best for you right now. Seek professional guidance or advice if you need it. And bear in mind that even though it’s an important decision, it’s not irreversible. If you later decide you’d prefer a different option, you can always make a switch.

Frequently asked questions

Pensions are long-term investments. You may get back less than you originally paid in because your capital is not guaranteed and charges may apply. Keep in mind that the tax treatment of your pension and investments will depend on your individual circumstances and may change in the future. Capital at risk.
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Ceri Stanaway is a researcher, writer and editor with more than 15 years’ experience, including a long stint at independent publisher Which?. She’s helped people find the best products and services, and avoid the pitfalls, across topics ranging from broadband to insurance. Outside of work, you can often find her sampling the fares in local cafes. See full bio

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