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SIPP vs personal pension: what is the difference?

5 mins read
by Alice Guy
Last updated February 4, 2025

We explore the differences between self-invested personal pensions (SIPPs) and personal pensions to clarify which option best aligns with your investment goals and retirement objectives.

Key takeaways
  • Personal pensions are a type of defined contribution pension that you open and contribute to yourself

  • There are three main types of personal pension - SIPPs, stakeholder pensions and standard personal pensions

  • SIPPs offer greater control and flexibility over investments than other types of personal pension, including asset options like stocks, bonds, and exchange-traded funds (ETFs)

  • Standard personal pensions and stakeholder pensions provide simplicity and convenience, with a more limited range of investment options

  • SIPPs and personal pensions offer tax-free growth potential, but returns may vary based on market performance.
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What is a SIPP?

A self-invested personal pension (SIPP) is a type of personal pension that gives individuals greater control and flexibility over their investments.

Like other personal pensions, you can open a SIPP if you already have a workplace pension. You can also open a SIPP if you don’t have a workplace pension.

Unlike standard personal pensions, which often limit investment options to a selection of funds, a SIPP allows investors to choose from various assets, including stocks, bonds, mutual funds, commercial property, and exchange-traded funds (ETFs).

A key feature of a SIPP is the ability to tailor your investment portfolio to align with your unique financial goals and risk tolerance.

Whether you're seeking long-term growth, income generation, or capital preservation, a SIPP offers the flexibility to design a personalised investment strategy that suits your needs.

Like any pension, with a SIPP, you can make tax-free contributions of up to 100% of your income each tax year, up to a maximum of £60,000, which includes personal contributions, employer contributions, and tax relief.

Exceeding the £60,000 limit within a financial year may result in a tax charge.

What is a personal pension?

A personal pension is a type of defined contribution pension where you build up a pot of money for when you retire. 

You can open a personal pension alongside or instead of your workplace pension. They are often a good option for self-employed workers who don’t have a workplace pension.

There are several types of personal pension including standard personal pensions, stakeholder pensions, group personal pensions and SIPPs.

Standard personal pensions typically offer a more limited selection of funds managed by the pension provider and are designed to provide individuals with a simple way to save for retirement. 

Similar to SIPPs, contributions to personal pensions also benefit from tax relief.

The pension annual allowance sets the ceiling for how much you can contribute to your pension in a single year and still qualify for tax relief. This is capped at £60,000 (or 100% of your annual income).

Exceeding this amount means forfeiting tax relief on the excess and incurring a tax charge.

What is a stakeholder pension?

A stakeholder pension is a type of pension pension where annual fees are capped, although they are not always the cheapest option. 

What is a group personal pension?

A group personal pension is a type of workplace pension scheme. It is a collection of multiple personal pensions for employees working for the same employer. The provider will automatically manage your investments on your behalf by investing in a default fund selected to suit a wide range of investors.

How does tax relief work on a personal pension

When you contribute to a personal pension, your contribution receives 20% tax relief which is claimed automatically by the pension provider. This means an £80 contribution is topped up to £100.

Higher-rate and additional-rate taxpayers can claim an additional 20% and 25% tax relief via their tax return or by writing to HMRC with details of their pension contributions.

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Personal pension vs SIPP: how do they compare?

Let's compare SIPPs and standard personal pensions below.

  • Range of investments: A SIPP gives you access to diverse assets and can include passive and actively managed investments. Personal pensions typically offer a more limited selection of funds managed by the pension provider.

  • Price: SIPPs may have higher fees due to their flexibility and active management, so investors should weigh the costs against their goals.

  • Ease of management: SIPPs demand more hands-on management, with investors responsible for selecting and monitoring investments. Personal pensions offer a simpler, provider-managed approach.

  • Potential returns: SIPPs and personal pensions offer tax-free growth, but returns vary based on investments and market performance. Investment returns can vary, so consider your risk tolerance and investment goals carefully.

By doing your research, diversifying your portfolio, and reviewing your investments regularly, you can better navigate the ups and downs of the market and make informed decisions.

SIPP or personal pension: which is better for me?

When choosing between a SIPP and a personal pension plan, which option is right for you? 

Ultimately, it depends on your individual circumstances, investment goals, and risk tolerance.

If you're comfortable managing your investments and want a wider range of choices, a SIPP could be the most suitable option. 

For example, a seasoned investor may opt for a SIPP as they want to hand-pick their investments and actively manage their portfolio to maximise returns.

With a SIPP, they can invest in a diverse range of assets and tailor their strategy to suit their financial goals.

If you prefer a hands-off approach and value simplicity, a standard personal pension might be more suitable.

For instance, a busy professional may choose a personal pension because they prefer a set-and-forget approach to retirement planning.

With a personal pension, the pension provider manages their investments. This allows them to focus on other things without worrying about actively managing their retirement savings.

Employers can contribute to SIPPs and personal pensions, so if you're eligible for employer contributions, consider that when making your decision.

Can I change from a SIPP to a personal pension and vice versa?

Yes, you can transfer from a SIPP to a standard personal pension or vice versa. You can also hold both a SIPP and a personal pension simultaneously. 

Switching from a SIPP to a pension fund offers simplicity and convenience since the pension provider manages investments, but it limits investment choices.

Moving from a pension fund to a SIPP gives you greater control and flexibility over investments, potentially yielding higher returns. However, it demands active management and may incur higher fees.

How to transfer a SIPP to a personal pension and vice versa

Transferring between a SIPP and a personal pension is straightforward, and pension providers and financial institutions facilitate the process.

This involves contacting the provider of the pension type you wish to transfer to and requesting the necessary transfer forms. 

The same can be said for transferring your personal pension to a SIPP.

Transferring pensions can take time, and there may be administrative fees involved. Getting financial advice can help avoid potentially losing any benefits along the way.

Seek expert financial advice

Ultimately, your choice between a SIPP and a personal pension plan will depend on your personal preferences, investment goals, and risk tolerance.

SIPPs offer flexibility and control, while personal pensions provide simplicity, so consider your comfort level with investment management and the level of control you desire.

By understanding the key differences between a personal pension and SIPP, you can make an informed decision that will set you on the path to a comfortable retirement.

Let Unbiased match you with a pension adviser for expert financial advice to ensure your retirement plans align with your long-term financial goals.

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Author
Alice Guy
Alice Guy is a freelance writer who used to be head of pensions and savings at interactive investor and has experience writing a range of personal finance content, specialising in pensions and investments. Alice is also a qualified chartered accountant who was trained by KPMG London.