In this article, we focus on a question we are often asked; is a SIPP better than a personal pension? Whilst this is always a matter of personal choice, aligned to your investment goals, this article should help you to understand your options, and what works best for you.
What is a SIPP?
Fast becoming a popular alternative to traditional pensions, a Self-Invested Personal Pensions (SIPP) is a form of pension “wrapper”.
SIPPs essentially allow you to build up a retirement pot in a very similar way to that of a personal pension. A SIPP is essentially a DIY pension. Therefore, the responsibility for choosing and managing your own investments is entirely yours.
Therefore, you’ll need to have the time and confidence to do this. Furthermore, good fortune aside, a certain degree of knowledge of investments would therefore be advantageous.
Considering the level of control and personal choice, a SIPP may sound very appealing.
However, there are many considerations you may need to make when investing for the long term. Therefore, we would suggest speaking to an experienced pension adviser, before making a decision.
Related reading: Pension glossary and jargon buster part one
SIPPs vs personal pensions – what are the differences?
Essentially, there are two main differences. They are:
- A SIPP offers more investment options than a typical personal pension
- They are charged differently
Furthermore, a third consideration is whether your employer would be willing to contribute towards your SIPP.
Simply put, not all SIPPs allow for employer contributions.
Further key differences between a SIPP and a personal pension
In this section of our article discussing whether SIPPs are better than personal pensions, we look at some other key differences.
Typically, the majority of personal pensions provide a multitude of options. Therefore, this level of choice should be satisfactory for most people.
Nevertheless, some workplace stakeholder pensions do have a narrower range of options compared to other personal pensions.
There are two key reasons for this:
- Lower charges (cheaper)
- Immediately accessible without the need for financial advice
A more experienced investor desiring greater control of their investments may prefer a SIPP.
Here are a couple of reasons:
- SIPPs offer a far greater range of investment options, including individual company shares from the UK and abroad
- Experienced investors know they can shelter their gains from taxation
Related reading: How much should you pay into a pension?
Are SIPPs more expensive than personal pensions?
Due to the complexity of SIPPs in comparison to personal pensions, you may be wise to seek the advice of an independent financial adviser to assist you in managing it.
Independent financial advisers charge a fee to manage pensions. This is typically a percentage of the overall value of the pension pots (funds under management).
Therefore, it would be wise to weigh up the additional cost this would incur, offset against any projected growth. Usually, charges on SIPP investments tend to be greater than those of personal pensions.
Typically, there are two types of charges:
- A fixed annual fee
- A percentage of the funds value paid yearly
If you have a significant pension pot, you may err on the side of selecting a scheme with an annual charge, to keep these costs as low as possible.
What happens if my SIPP or personal pension provider goes bust?
In the unfortunate event of your personal pension or SIPP provider going bust, the Financial Services Compensation Scheme (FSCS) would step in.
The FSCS will cover up to £85,000.
On the other hand, personal pensions offered by life insurance companies typically cover up to 100% of your pot in the event of the pension company going bust.
This is a crucial differentiation.
Therefore, it is certainly worth checking before you invest either way. As mentioned above, we would recommend seeking the specialist advice of a pension specialist.
Related reading: Are you at risk by not understanding your pension?
Article summary – are SIPPs better than personal pensions?
Unfortunately, there’s no cut-and-dry answer to this question. As suggested at the start of this article, it is a matter of personal choice.
Experienced investors, with an appetite to manage their pension and financial futures, may prefer a SIPP. Conversely, if you desire a simple pension plan to help you achieve a financially free retirement, a personal pension may be right for you.
It is possible to transfer from a SIPP to a personal pension with relative ease. However, it’s a lot more common for a personal pension to be transferred to an SIPP, as opposed to the other way around.
When it comes to the matter of tax, there is little difference between the two. Both options are flexible enough to be given lump sums, regular contributions and employer contributions. Please note from earlier in this article, not all SIPP providers allow for employer contributions.
So, is a SIPP better than a personal pension?
It really is up to you.
For accurate guidance based on an assessment of your current and future plans, we would always recommend speaking to a local pension adviser. They will help you to understand the benefits and risks of each option.
Call us now on 01329 550190 to schedule a free consultation.