SIPPs vs personal pension

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

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 Youinvest, 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.

What are the pros and cons of regular personal pensions?

What are the pros and cons of SIPPs?

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

• What type of personal pension is easiest to manage?

  Standard personal pensions are easiest to manage. That’s mainly because you have very little to do with directly managing the investments. Instead it’s done by your pension provider, usually in accordance with a broad approach that you choose at the outset. That’s not to say you should ignore a standard personal pension entirely. It’s worth keeping an eye on how investments are performing, and the impact of any charges. If you’re not happy with either, you are free to transfer to another scheme. SIPPs involve more active management, as you’re responsible for choosing and trading specific investments and monitoring their performance. If you wish, you can employ an investment manager to do so, but this will come at additional cost.

• Can I have a SIPP and a regular personal pension?

  Certainly, if you wish. There’s no limit on the number of separate personal schemes you can own. You might, for example, want to hedge your bets by keeping some money in the lower-hassle and lower-risk environment of a standard personal pension, and some in a SIPP that you actively manage and perhaps take more risk with. Bear in mind that you’ll pay charges for both though, and the higher charges often involved in SIPPs can make them less suitable for small pots. If you’re splitting your funds, this will obviously mean the size of each pot will be smaller. Bear in mind too that there is an annual allowance for most people of £60,000 (or the equivalent to your annual salary, if this is lower) that applies to your total pension contributions each year. Any contributions above this won’t benefit from tax relief.

• How are SIPPs and personal pensions different from workplace pensions?

  All 3 types of scheme benefit from tax relief, so are a good way to save for retirement. However, workplace schemes are selected by your employer and you’ll need to make regular monthly contributions from your salary. A major advantage of workplace pensions over any type of personal pension, though, is that your employer usually has to contribute too. This perk means that it’s almost always worth prioritising paying into a workplace pension before you make any contributions to a personal pension or SIPP.

• What's a stakeholder personal pension?

  Stakeholder pensions are similar to standard personal pensions, but there are strict government rules about how they’re managed. Annual management charges are capped (though they’re not always the lowest available). They also allow low minimum contributions, and you can stop and start payments and transfer out at no cost. Investment options tend to be more limited than even standard personal pensions.

• Can I get help to decide between a SIPP and a personal pension?

  Yes. You can get general guidance on your options from the pension experts at the government’s MoneyHelper website. If you want personalised, regulated advice based on your specific needs and circumstances, you can pay a financial adviser. You can find directories of qualified advisers on the MoneyHelper website, the Society of Later Life Advisers, The Personal Finance Society and Unbiased.