SIPPs vs personal pensions – which is best?
The answer to whether a SIPP is better than a personal pension relies on so many factors. In this article, we discuss a number of considerations, and differences between the two alternatives and offer insights into SIPPs vs personal pensions.
When it comes to retirement planning, the choice between a Self-Invested Personal Pension (SIPP) and a traditional personal pension can be pivotal.
Over the next few minutes, we will delve into both options, exploring their advantages and drawbacks to help you make an informed decision whether you, feel a SIPP is better than a personal pension.
What is a SIPP and how do they work?
A Self-Invested Personal Pension (SIPPs) is a type of pension “wrapper”. It essentially allows you to build a pot for your retirement in much the same way as a personal pension.
SIPPs have become a popular alternative to your traditional personal or stakeholder pension, but why?
Are they better? Many people are under the impression that a SIPP would provide better returns than a personal pension, but how true is that? SIPPs certainly sound sexier than personal pensions, but what’s the best option for you?
SIPPs vs personal pensions
A SIPP is a type of personal pension that offers more investment options. This and the way they charge are the two main differences. There is also a third consideration which is whether your employer would be willing or able to contribute to your SIPP, as not all SIPPs would allow employer contributions.
How are they different?
From an investment perspective, most modern personal pensions offer a wide range of investment funds to choose from and this should be adequate for most people. Some workplace stakeholder pensions, however, do have a narrower range of funds available than personal pensions.
This is primarily to ensure that they remain cheap and accessible for inexperienced investors who would typically need to join quickly without the need for financial advice.
SIPPs however offer a much wider range of investment options, including individual company shares from the UK and abroad, collective investments such as open-ended investment companies (OEICS) and unit trusts, commercial property and investment trusts.
The more experienced investor who wanted more control over their finances may find the SIPP the better option. The SIPP investor would be able to use their SIPP to shelter any investment gains from tax.
Related reading: How much should I pay into my pension?
Are SIPPs more expensive than personal pensions?
The added complexity of a SIPP means you’d almost certainly need a financial adviser to help you manage it.
This would be an added cost and one would need to weigh up the cost benefit of that. Charges imposed on SIPP investments tend to be higher than those of personal pensions, however, some SIPPs charge a fixed annual fee as opposed to a percentage of your pot, which could be beneficial for those with larger pots.
What would happen if your personal pension or SIPP company went bust? Well, the Financial Services Compensation Scheme (FSCS) would step in.
Personal pensions that are run by life insurance companies would normally cover up to 100% of the value of your pension pot if the pension company went bust. A SIPP provider, on the other hand, would be covered up to £85,000 per pension scheme member.
This is an important differentiator and one worth checking before you took the plunge one way or another.
So, is a SIPP better than a personal pension?
Frustratingly, there’s no simple answer. The more experienced investor looking to invest in interesting or esoteric assets such as commercial property, individual shares and commodities such as gold and silver may prefer the SIPP route.
Anyone who simply wanted to plan for their retirement in as simple a way as possible may be better off with a personal pension.
The good thing is that SIPPs and personal pensions are easily transferred from one to the other, although it’s more popular to transfer a personal pension to a SIPP than the other way around.
From a tax perspective, there is little to choose between the two – SIPPs work in exactly the same way as a personal pension. They are also flexible enough to receive lump sums, regular contributions and sometimes, employer contributions.
The worst case (and sadly quite common) is the investor who liked the sound of a SIPP and bought one, paying for the privilege without using any of the many options available. We see this every day and it’s a complete waste of money. Don’t fall into that trap.
Need pension advice?
If you are reviewing your current pension investments, and require the advice of a specialist, we are on hand to help. Sterling & Law has a network of pension advisers in London, the Home Counties, and the South of England.
Find out more about our pension advice service today. Alternatively, to request a callback, please contact us on the number below.
Related reading: Self-invested personal pensions (SIPPs)
