Interactive Investor

Workplace Pension vs SIPP

Self-invested personal pensions (SIPPs) and workplace pensions are two options for your retirement savings. Understanding how they work can help you get the most out of them and build a valuable pension pot for the future.  


What is a workplace pension?

A workplace pension is a scheme arranged by your employer to enable you to save for your retirement. While they all fall under the workplace pension banner, there are a variety of different types of scheme. 

The most common type of workplace pension is a money purchase or defined contribution scheme. These are built up from contributions you and your employer pay in, plus tax relief from the government.  

They can include group personal pensions, group stakeholder pensions, and even group SIPPs, although these are more unusual and tend to be offered to high earners and senior management. 

Across all of these defined contribution schemes, how much you receive at the end is down to how much is paid in, plus the performance of your pension investments.  

The other type of workplace pension is known as a defined benefit scheme. These provide you with a pension based on your salary and the number of years you worked for the employer rather than how much was paid in. 

As this guarantee makes them a more generous pension, defined benefit schemes are not very common outside of the public sector. 

Can I have a SIPP and a workplace pension?

Yes, you can have a SIPP and a workplace pension and there are some benefits to doing this. 

By having a workplace pension, you can benefit from your employer’s contributions, currently a minimum of 3%, with your SIPP giving you greater investment freedom for any additional pension savings you have.

Running two or more pensions can be a great option but you do need to stick to the rules on allowances. Each year, you can pay the lower of £60,000 or 100% of your annual earnings into your pensions and receive tax relief. This allowance includes your own contributions but also anything your employer contributes and the tax relief. 

It is relatively simple to keep tabs on what has gone into your workplace pension if it is a money purchase scheme. However, working out what has been paid into your workplace pension gets a little more complicated if you have a defined benefit scheme. 

As these are based on what you will receive in the future, you need to work out what this equates to as a contribution, or to use the technical term, the pension input amount. This is the difference between the opening value of your pension at the start of the tax year and its closing value at the end of the tax year. 

More information on how to calculate this, can be found here.

Can my employer contribute to my SIPP?

Yes, even though you may have set up your SIPP yourself, some employers will pay into this for you instead of the workplace pension. They are not obliged to do this, but it is worth asking. 

Getting your employer to pay directly into your pension is really tax-efficient, whether that is your SIPP or your workplace pension. 

This example shows how much better off you could be if your employer pays directly into your pension. 

Employer contribution

Employer contributions are made from your gross salary without any income tax or employee and employer national insurance deducted. A £1,000 contribution will land in your pension as £1,000, although there is no tax relief to add as it was paid gross. 

Some employers will also pass on some, or all, of their national insurance savings. 

Contribution from taxed income

If you make a pension contribution from your taxed income, your £1,000 of salary will be reduced by income tax and national insurance. For a basic rate taxpayer, this is £200 in income tax and £80 in national insurance. 

This means your £1,000 of salary is now only £720. When this is paid into your pension it is topped up to £900 with 20% tax relief, but this is £050 less than if your employer had made a contribution directly into your SIPP. 

Can I transfer my workplace pension to a SIPP?

Yes, there is nothing to stop you transferring a workplace pension or pensions to your SIPP. 

Sweeping up workplace pensions from former employers into your SIPP makes it easier to manage your retirement savings. It also means that more of your pension savings can benefit from the investment freedoms offered by SIPPs.

It is also possible to transfer your current workplace pension, leaving it open for future contributions but moving the fund that has built up into your SIPP. This is known as a partial transfer and, like a full transfer, can make it easier to manage your pension savings as well as giving you access to a much broader range of investments. 

If you have any defined benefit pension schemes, whether from previous employers or your current one, the decision about transferring is more difficult. Defined benefit pensions include guaranteed benefits that you might not want to give up. 

The value of these benefits can be so great that the regulator requires you to take financial advice if you want to transfer a defined benefit pension with a value of more than £30,000.   

Getting financial advice

If you are unsure about your workplace and SIPP options, it is worth seeking professional financial advice. An independent financial adviser will be able to assess your circumstances and recommend the most appropriate action to achieve your goals. 

If you are over 50, you can get free and impartial pensions guidance from Pension Wise. This is a government service designed to help people understand their pension options.   

How can Pension Wise help?

If you have a defined contribution pension scheme and are 50 or over, then you can access free, impartial guidance on your pension options by booking a face to face or telephone appointment with Pension Wise, a service from MoneyHelper

If you are under 50, you can still access free, impartial help and information about your pensions from MoneyHelper

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Please remember, SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial advisor before making any decisions. Pension and tax rules depend on your circumstances and may change in future.