SIPP vs personal pension – which is best?

Keen to start saving for your retirement? Or already have a pension and not sure it’s in the right place? Here’s everything you need to know to make the right decision between a SIPP and a personal pension.

First, let’s just make sure we’re on the same page, and run through what both a personal pension and SIPP are.

For a quick summary, they’re both personal pensions, but a SIPP is a self-invested personal pension – you have the option to make the investment decisions yourself. With a personal pension, the experts handle the investments for you. To confuse this a little, this can also happen with a modern SIPP too.

What’s a personal pension?

A personal pension is a pension that you manage and you decide which pension provider (pension company) you want to use to help grow your money over time. They’ll take care of everything, all you need to do is add you money (we recommend regular monthly contributions).

You can add however much you like to it, up to your total income per year (e.g. your salary), or £60,000, whichever is lower, and you decide when you’d like to take the cash (as long as you're older than 55).

They’re different to workplace pension schemes, which is a pension your employer sets up for you when you join a company, and they’ll decide which pension provider it is, and often which pension plan your money is invested in.

Both a personal pension and workplace pension are types of private pensions (so private to you). There’s also the State Pension, which is the government pension, and you’ll get this if you've paid enough National Insurance contributions over the years (at least 10 years, but 35 for the full pension amount).

A note about workplace pensions

Some workplace pensions are defined benefit pension schemes. These are common in government jobs and places like the NHS – it’s where you get a set income when you retire, and depends on things like your salary and how long you’ve worked there. A common version of these were final salary pensions, but very rare now.

Note: it might not always be a good idea to transfer these types of pensions to a personal pension scheme. And if the transfer value is over £30,000, you’ll need to speak to a financial advisor first (legally). The good news is finding a financial advisor is super easy. You can simply use Unbiased¹ – a website for financial advisors. They’ll find the best financial advisors in your area and connect you directly with them.

The majority of people have a defined contribution pension scheme, which is where your employer contributes at least 3%, and you contribute at least 5%. Although if you have a nice employer, they might add more. 

When you leave a job these can be transferred easily, potentially saving money on high fees, and poor performing investments. A good provider like PensionBee¹ will handle the whole transfer process.

What’s a SIPP?

A SIPP, or self-invested personal pension, is a type of personal pension, with all the same benefits (more on those below), except instead of experts handling things for you, you can decide where you want your money invested – which investments to buy, and when to buy and sell. It’s completely up to you!

SIPPs are great if you want to manage your own investments, and you know what you’re doing when it comes to investing – you have the flexibility to do what you like and have a wide range of investment options – rather than experts managing things.

There is a slight caveat, with more modern SIPPs, experts can also manage the investments for you too. You get to decide which pension plan you’d like from a few simple options, such as socially responsible investing (no fossil fuel companies etc.), or a standard pension plan. 

If you're looking for one of these check out PensionBee¹ and Moneyfarm¹ – both are highly rated, have low costs and a great track record of growing money.

It's often a good idea to simply let the experts take care of your pension. It is your retirement savings after all!

You can have as many personal pensions and SIPPs as you like too – so you can have both a personal pension and a SIPP. One where the experts manage it, and one for investments that you’d like to make in addition to the experts.

Benefits of personal pensions

Personal pensions (including SIPPs), have some enormous benefits for saving for your future and building your retirement savings. You really can’t beat them!

Government bonus

As saving into a pension is intended to be completely tax-free, the government actually gives you a bonus every time you pay into your personal pension.

Seems crazy right? But it’s true!

If you are an employee of a company, you’ll be paying into a workplace pension scheme through your salary – this money is actually taken from your pay before you pay tax.

However, for a personal pension, you can’t pay into it until after you’ve already paid tax on your income. So, they return the tax you’ve paid straight back into your pension pot.

You’ll get a 25% bonus automatically added every time you contribute, which is refunding the basic rate of tax (earning up to £50,270), and if you’re a higher rate tax payer (40%), earning over £50,270, or additional rate tax payer (45%), earning over £125,140, you can claim tax back at those rates too (on your Self Assessment tax return).

No Inheritance Tax

An undervalued perk with pensions is that there’s no Inheritance Tax to pay. That’s what your family might have to pay on your estate, which is all your money, investments and property added together after you pass away. If this is over £325,000, they might have to pay 40% on everything above this. Not ideal!

However, with a private pension, it goes straight to your beneficiary (like your spouse or partner), who you name with your pension provider. It does not become part of your estate.

And if you pass away under 75, they won’t have to pay any Income Tax on it either. They might do if you pass away over 75 (it depends how much they earn per year at the time).

Consolidate your pensions

With personal pensions, you can actually transfer them to a new provider any time you like, however that’s not the main benefit, you can actually transfer them all to the same provider if you like.

This has some great advantages, first, you won’t forget where all your pensions are – they’re all in one easy to remember place, making it much easier to manage and track over time too. If you’ve had lots of jobs in the past, you might have pensions all over the place!

And very importantly, you can actually benefit from lower fees too. Pension providers often reduce their fees when you have more saved with them (as a % of your pension). This could potentially add up to a big saving over time!

If you’re keen to consolidate your pensions, check out PensionBee¹ – they’re a 5 star rated provider with low fees and makes pensions super simple. They’ll even handle the whole transfer for you.

Which pension is best for me? (SIPP vs personal pension)

Right, down to business! Which pension is best for you, a self-invested personal pension or just a ‘regular’ personal pension?

It all comes down to whether you want to make your own investments or not, which entails devising the right investment strategy for you, finding the right investments and then buying (and selling) the investments over time.

The investments are often investment funds or pension funds – investments designed to grow over time, and either as part of the fund, or independently, you can invest in stocks and shares (where you buy and own a small part of a company, a share of a company), bonds (loans to governments and large businesses), and commercial property (normally to generate rent).

It’s not for everyone. And in fact, it’s not for most people! Even professional investors don’t often manage their own pensions – it’s not worth the time when experts can manage everything for you now at a very low cost, and have a great record of growing money over time.

If you manage your own investments, you might find the experts are also buying the same investments and pension funds, or very similar ones – as the best strategy for pensions is to grow safely and sensibly over time. So, you can save a lot of time and effort, by simply using an expert-managed pension provider.

Nuts About Money tip: if you’re not sure what you’re doing when it comes to investing, we recommend going for an expert-managed personal pension. You can’t really go wrong, the experts handle everything for you.

However, if you do want to manage your own investments, great! A traditional SIPP is perfect for you. 

By the way, you can have as many personal pensions as you like, so you could have a traditional SIPP to manage some investments, and an expert-managed personal pension to handle the majority of your pension.

We’ve reviewed the best personal pensions to make things easier for you – and if you’re ready to find a new provider, below are the best expert-managed personal pensions (both personal pensions and SIPPs), and below that, the best traditional self-invested personal pensions.

The best expert-managed personal pensions

Here’s the best personal pensions managed by experts:

The best self-invested personal pensions

If you’re looking to manage your own investments, here’s your best options:

Prefer to speak to someone?

If you're a bit unsure about pensions and would prefer to speak to an expert, check out Unbiased¹ – it's a free service to find pension experts (financial advisors) in your local area.

Transferring your pension

Wondering if you can transfer your existing pensions, or if you should? The answer to both is yes!

You can transfer any personal pensions you have, whenever you like, and if you have lots of pensions from various jobs over the years, you can move them whenever you like too. The only pension you can’t transfer is your current workplace pension – you’ll have to wait until you leave your company to do this.

And should you transfer your pensions? Often yes, why not move them to a top provider with low fees and a great track record of growing your money over time? Plus one that’s super easy to manage and shows you balance whenever you like. Do you know how much is in your pensions right now?

It's worth noting that most workplace pension providers can be pretty expensive, and have poor records for growing money. So, if you’ve got any old ones, it might be a good idea to transfer them to a top provider.

We’ve listed the top providers above, but as a recap, PensionBee¹ comes out top – they’re rated 5 stars, are low cost and super easy to manage your pension.

What happens when you retire?

Thinking ahead to your retirement? Things get pretty simple with personal pensions. It’s all up to you what you’d like to do!

After you reach the age of 55 (57 from 2028), you’ll be able to start taking your pension if you want to (although we recommend keeping it invested for as long as possible so it grows more).

You can use it to buy an annuity, which provides a guaranteed income every month for the rest of your life (or for a set number of years), or you can keep it within a pension pot, and perhaps moved to a pension plan that aims to provide a regular income – and simply take an income when you want to.

The first 25% of your pension is completely tax-free too. You can take this all in one go as a tax-free lump sum if you want to (sometimes people do this to pay off their mortgage), or if you take regular payments, 25% of each payment will be tax-free.

The remaining 75% will count towards Income Tax, and works just the same as your income now (e.g. your salary). You’ll still get the Personal Allowance of £12,570 per year too (how much you can earn before you have to pay Income Tax) – so you might not actually pay any tax at all.

Let’s recap

Pensions can be pretty complicated, but we hope we’ve made things a bit clearer!

An expert-managed personal pension is often the best choice for most people – and these can be SIPPs or regular personal pensions. A self-invested personal pension can be a good option for those who know what they’re doing and want to make specific investments, but even then, why not just let the experts handle things for you?

We highly recommend using an expert-managed personal pension – using a top provider means you’re likely to make more money over time, as their experts will use the best investment strategies. They’re low cost, and super easy to use, track and manage your pension over time.

Our recommended expert-managed pension provider is PensionBee¹ – they’re low cost, have a great track record of growing money over time, and will handle everything for you (even the pension transfers). We’ve reviewed all the best providers if you want to compare pension providers.

If you’re keen to manage your own SIPP, you can’t go wrong with AJ Bell¹.

Either way, good job on planning for your future! It makes a huge difference to your retirement. You’ll thank yourself later!