Researching pensions can put you face-to-face with a lot of terminology and industry jargon that you may be seeing for the first time. Some terms may sound familiar, while others may be completely new. However, the basic principle of a pension is always the same: a way to put aside money for your retirement so that it can grow over time. In this article we will cover a type of pension that you may have read a lot about – a SIPP – and how it relates to other types of personal pension. A SIPP (self-invested personal pension) is a personal pension product, but it varies from a standard personal pension. Here we will explain the key differences between a SIPP vs a standard personal pension and help you decide what might be the best option for your retirement savings.
What is a personal pension?
A personal pension is a financial product that you can use to save up for your retirement. It is different from a workplace pension because you set it up yourself, and different from a savings account because you can benefit from significant tax relief.
A personal pension is a form of private pension. We cover the basics of a private pension in our article ‘What is a private pension?’.
You pay in a regular amount every month – or lumps sums whenever you can afford it – to build your pension pot into something that can support you through retirement. The money you save is invested in order to help grow your pot. The amount of control you have over these investments will depend on which type of personal pension you opt for. A standard personal pension offers limited control over where the money goes, while certain SIPPs will give you full licence to invest wherever you choose.
Your personal pension will need to be set up by you, so you will have to select the provider and the type of pension yourself. You will also need to fund it yourself, though you will still have your payments topped up through tax relief from the government.
If you have a lot of different pensions – including workplace pensions from old employers – you can consolidate them into one personal pension. This can help you keep costs down and limit the chance of unexpected fees eroding your pension savings. You should avoid switching your old pension if it is particularly valuable, for example if you were part of a defined benefit scheme with a previous employer. You can find out more by reading our article ‘Can I have a personal pension and a workplace pension?’.
Read more about workplace pensions and personal pensions in our article ‘How do private pensions work?’
What about a SIPP?
A SIPP (self-invested personal pension) is a type of personal pension. You can use it to save and invest your money in order to build and grow a retirement fund. It shares most of the characteristics of a standard personal pension, but comes with more flexibility. Instead of a pension provider making the calls on where your money goes, you can pick and choose where you want to invest your savings.
This extra control that a SIPP offers over a standard personal pension comes with added responsibility. You are the one choosing your investments and managing the account, though there are ready-made SIPPs that will make a lot of decisions for you. For savers with good knowledge and experience in investing, this flexibility can be a real bonus and a great way to get the most out of your retirement savings.
Your personal pension is likely to be a defined contribution pension, which means that what you get when you retire depends on how well you can grow and build your pot. Some savers might see a SIPP as the perfect opportunity to use their investment know-how to boost their retirement prospects.
You can learn more in our article 'Is a SIPP worth it?'.
What makes a SIPP different to other pensions?
A SIPP is different to a standard personal pension because you will need to select and manage your own investments, unless you choose to get help from a financial adviser or pick a provider that offers a ready-made portfolio or robo-advice service.
This enhanced level of control means that a lot of the performance of your pot is going to come down to the choices you make. This can be a positive or a negative, depending on how confident you are with investing money. On the positive side of things, you can make as many changes as you like and put your money where you think it will perform best. You can structure your pension around what you think will perform well or invest in areas that align with your ethics and worldview.
The negative is that you have limited protection if your decisions lead to your pension performing poorly, especially if you opted not to take financial advice from a regulated financial adviser.
A SIPP also offers a wider array of investment options than a standard personal pension. Where exactly you can invest will depend on the provider you choose, but your options can include investment trusts, unit trusts, company shares, land, commodities and some types of property. While you will not be able to invest in residential property, you can use a SIPP to invest in commercial property or a collective property investment. You are also not limited to UK companies, so you can buy shares from all over the world.
This variety and freedom can be a great benefit, especially if you have strong investment experience. If you do not have a background in investing, there are still options you can take to get the most out of your money.
What if you don’t want to choose your own investments?
One option for savers who do not want to pick their own investments is to speak to a regulated financial adviser. Financial advice is not usually free, but it can certainly pay in the long run to ensure your money is being invested in the right places for you. Keep in mind that getting financial advice will not guarantee that your pension investments are going to soar. There is always a risk in investing and your pension pot might go up or down.
Another option is to pick a ready-made SIPP. This still requires a bit of decision making, but the focus is more on calculating your appetite for risk rather than relying on any investment experience. There are a lot of providers on the market offering these types of pension that eliminate a lot of the difficult choices without limiting where you can invest your money too much. You can still stick to ethical funds and limit risk-taking, if that is your preference. Or you can go for a riskier option, even if you do not have the experience to back it up on your own.
A lot of these providers use a form of robo-advice. This is a technique employed by digital investment platforms to automate financial advice. It involves using an algorithm to process the answers you give to questions about your financial situation and investment goals. It can then give advice and invest for you based on the data you provide.
Is a SIPP the right choice?
If you are in the UK and under 75, there are no barriers to you opening a new SIPP. Some providers will have minimum amounts you need to invest or hold in your account, while most will charge lower fees if your pot exceeds a certain amount. However, you can still open a SIPP and contribute what you can to start saving for your retirement.
You should keep in mind that the money you contribute is strictly for your retirement, so you will not be able to access it until you you reach age 55 (rising to 57 by 2028). You can find out more by reading our article ‘Can I withdraw my pension?’.
SIPPS are generally more suited to savers with some investment experience. Long-time investors can use the freedom and range of a SIPP to develop their pension pots, while first-timers will likely need to use a regulated financial adviser or a robo-advice service.
You may also find that you do not need a SIPP – or any kind of personal pension – if you have a particularly good workplace pension. Many employers will increase their contributions to your workplace pension based on what you pay in. For example, your company may pay double the contributions you make up to a certain percentage of your salary. Ideally, you should make sure you are contributing enough to trigger the maximum employer contributions before you start to put money into a SIPP.
Is a SIPP safe?
If you hold a personal pension with a provider regulated by the Financial Conduct Authority (FCA) you are usually protected up to a total of £85,000 through the Financial Services Compensation Scheme (FSCS) should the provider go bust. If the personal pension is structured as a ‘contract of long-term insurance’ you will be protected with no upper limit.
Most SIPPs are only protected by the FSCS up to £85,000 per account held with a provider should the SIPP provider go bust. However, the individual investments held through your SIPP are considered separately as part of the FSCS protection. As a consequence, you will have be to able to claim compensation of up to £85,000 if the manager of a fund you hold collapses. You will not be covered for individual shares.
It is important to remember that this protection applies to a provider or manager going bust, not a loss caused by poor investment performance. An exception could be if you suffer a loss as a direct consequence of poor financial advice from a UK regulated adviser. In this case you may be able to claim FSCS compensation, though your starting point – if your adviser is still trading – should be making a complaint to them and then through the Financial Ombudsman Service.
What types of SIPP are there?
SIPPs can be split into two main categories: ready-made SIPPs and DIY SIPPs. Here we run through the basics of both.
DIY SIPP platforms generally offer more variety than ready-made options, but you will need to do all the work yourself. You will need to do your own research too, including what fees are charged for different investments and trades, and calculate how you want to grow your pot to the extent it can support you when you decide to retire.
If this all seems like too much you can seek out a regulated financial adviser to help you plan for retirement.
Choosing a ready-made SIPP portfolio will mean most of the investment decisions are made for you. Providers will use a simple questionnaire to generate data for a robo-advisor algorithm to estimate your appetite for risk and select a plan for you. There are still calls for you to make, as working out your attitude towards risk is not always simple, but most of the leg work is done for you.
As you might expect, these options will not be the cheapest. The more work you are asking your provider to do, the more you are likely to have to pay in fees and charges. However, many of these platforms specifically target funds with low management charges, which can make the pricing more competitive. You could also benefit from special deals and limited-time offers, which we cover in our article ‘Best pension in the UK’.
Even though ready-made SIPPs are a simple option for low-confidence investors, it is still important to do some basic research. It is always worth figuring out what you want to do with your money, even if you are using a platform that will make the day-to-day choices for you.
We have more information on ready-made SIPPs in our article ‘Best ready-made pension’.
Taking money from a SIPP
Once you turn 55 (changing to 57 by 2028), you will hit retirement age and can start taking money from your SIPP and other pension pots. You can do this by choosing one of the options below, or using a combination of different options.
- Option 1: Use your pension pot as a flexible retirement income through pension drawdown. This is when you steadily withdraw the money you have saved up as if you are paying yourself an income.
- Option 2: Buy a lifetime annuity, which is a guaranteed income for life. We explain how annuities work in our article ‘What is an annuity pension?’.
- Option 3: Do nothing. Leave your pension pot untouched and continue to work or use other savings as a source of income. There is no deadline to use your pension savings and you can wait to access your pot until the time is right for you.
- Option 4: Withdraw your entire pension pot, of which 25% can be withdrawn tax free.
- Option 5: Mix things up and pick a few options. You could withdraw a lump sum – for example up to the 25% tax-free limit – then use pension drawdown, or buy an annuity, or both.