Workplace pensions vs SIPPs – Which is the Best Option for you?

by Josh Biggs in Finance on 16th October 2018

At present, the UK State pension comes to a paltry £8,500 each year, which is less than would be earned through the minimum wage during the same period. It’s little wonder that those approaching retirement are increasingly concerned about their futures.

It should also come as no surprise that people are looking to optimise the value of their workplace and personal pension schemes in the current climate, as they strive to take a more proactive approach to safeguarding their financial future.

In this post, we’ll consider the pros and cons of workplace pension plans and SIPPs before asking which option could be best for you.

SIPPs – The Pros and Cons

A Self-invested Personal Pension offers far greater flexibility than standard funds, both in terms of control and the range of investment options available to investors.

As well as greater flexibility, SIPPs could offer the ideal home for existing pension pots that are currently tied up in other schemes. If you’ve worked for several employers and have numerous pensions as a result, service providers like Bestinvest will allow you to transfer these into a single fund while covering a fixed amount of transfer costs.

Despite the benefits, there are some drawbacks with SIPPs. These funds only offer value to investors who have the skills, knowledge and desire to take advantage of the superior choice and control.

Even if you can reduce the cost of managing your fund by transferring capital into a SIPP, you may sacrifice some valuable benefits associated with your existing pension. It’s also important to note that employers are not obligated to contribute to a SIPP.

What about workplace pensions?

In contrast, workplace pensions are funds that usually benefit from fixed employee and employer contributions on a monthly basis.

While this type of product does not boast the flexibility of a SIPP, it does include a mandated contribution from your employer. So long as you’re older than 22 and younger than the State pension age (and earn more than £10,000 per annum), you’ll be automatically enrolled into a workplace scheme by your employer and contributions will be taken directly from your salary (and the company’s coffers).

While the current minimum contribution for employers is fixed at 2%, this will increase to 3% from April 6th, 2019. This will bring the total minimum contribution for all workplace contributions to 8%, which is great news for investors throughout the UK.

The obvious downside with this type of pension is the aforementioned lack of flexibility, and the lack of control available to investors. So while it’s ideal for young workers or people with little or no financial knowledge, this type of scheme may prove a little frustrating for individuals who are well-resourced and capable of making their own investment decisions.

So which option is right for you?

Ultimately, there are pros and cons associated with both of these options, and a lot of it will depend on your age, knowledge and unique financial circumstances.

The key is to take an interest in your current workplace scheme and its primary benefits before measuring these against the advantages of a SIPP and determining whether or not it makes sense to transfer your funds.




Categories: Finance