Personal Pensions vs SIPPs, Stakeholder Pensions and more
Personal pensions are one of several available options to help you secure an income in retirement. But how do they differ from other types of pension, do you really need one, and what are the alternatives?
In this article we’ll take a look at how personal pension plans compare with other options you might consider, including:
What is meant by ‘personal pension’?
First, a quick recap of what we mean by the term ‘personal pension’. Essentially any pension that is not offered by an employer is classed as a personal pension, and there are three main subtypes: SIPPs, stakeholder pensions and private pensions.
While these three categories cover a lot of ground, a common feature of all personal pensions is that they are ‘defined contribution’ schemes; in other words their value depends on what you put in plus any investment growth, i.e. not on any employer contributions or other benefits.
Informally, many people use the term ‘personal pension’ to mean a straightforward pension plan where investments are managed by the provider and there is no employer input. You may also hear it being used interchangeably with ‘private pension’, which we’ll go on to discuss later.
Personal pensions vs SIPPS
A Self Invested Personal Pension or SIPP is itself a type of personal pension, however it offers a much higher degree of flexibility and control than a standard personal pension in terms of how and where your money is invested, resulting in potentially greater returns.
SIPPs also require a lot more direct involvement from you, because you manage your own portfolio. While most personal pensions offer some degree of investment choice, the range of funds you have access to is still heavily restricted by the fund manager.
So a SIPP could be a great choice if you’re a confident investor.
|SIPP vs Personal Pension Plan at a glance|
|‘Standard’ Personal Pension||SIPP|
|Tax relief on all contributions and 25% tax-free lump sum at retirement||Tax relief on all contributions and 25% tax-free lump sum at retirement|
|Limited investment choice||High degree of investment choice|
|Low charges available||Typically higher charges|
|Low risk profile||Moderate risk profile|
|Low maintenance||Higher maintenance|
Personal pension vs stakeholder pension
A stakeholder pension is another type of personal pension that has many similarities with a ‘standard’ personal pension: it’s also a defined contribution scheme where the contributions you make are invested on your behalf by the provider, so no particular investment knowhow is required on your behalf.
What makes it distinctive is that stakeholder pension schemes are more heavily regulated, which is intended to protect your interests as a saver. For example, the minimum contribution is fixed at £20, and the provider cannot increase this. Fees for using a stakeholder scheme are also guaranteed not to exceed 1% of the value of your pension.
Private pension or personal pension?
Another subtype of personal pensions, a ‘private’ pension works much like a stakeholder pension in most regards, but crucially it doesn’t come with the same set of legal protections.
This means providers are free to set fees, minimum contributions and other charges as low or high as they like, so there is less certainty in terms of what you’ll pay to be a member of the scheme.
However, private personal pensions offer a wider range of investment types and options, which can make them an attractive prospect if you want to expand your portfolio to include funds from beyond the providers ‘core’ offering – this may result in higher rewards as well as more potential risk.
Personal pension vs workplace pension
If you’re already enrolled in a workplace scheme by a current or former employer, you might be wondering if you need a personal pension on top of it.
Workplace pensions of all kinds can be lucrative due to the additional contributions made by your employer, but many people like to have their own separate provision in the form of a personal pension.
This may be because they want a different type of provider than the one offered by their employer, to reduce risk to their savings by spreading them across multiple plans, or simply to take full advantage of the tax advantages afforded by pension schemes by enrolling in more than one.
Do I need a personal pension if I already have a workplace pension?
To answer this questions you’ll need to ask: will your workplace pension be enough to see you through retirement? If you have a final salary pension, this might be easier to answer, as you’ll already have a good idea of what your income in retirement will be and if that’s likely to be enough. But if not, it may be harder to predict the eventual value of your pension.
It’s also worth bearing in mind that you can always continue to pay into a workplace scheme after you’ve moved jobs, and long after the original employer has stopped contributing – so you can treat any former workplace scheme you’re part of as a personal pension if you’re happy with it, or transfer its value to another provider if not.
Personal pension vs group personal pension
A ‘group personal pension’ is a type of pension plan offered in some workplaces. The only real difference between group personal pensions and straightforward personal pensions is that the employer chooses the provider and can also make contributions.
SIPPs vs group personal pension
A group personal pension differs from a SIPP in that doesn’t allow you to choose and manage your own portfolio, and as it’s chosen and set up by an employer, your degree of choice, as well as your level of involvement, will be lower than it would be with a SIPP.
Personal pension vs savings
Pensions are essentially a type of savings account, so why not simply use an ISA or other savings account for your retirement fund? To answer this question, here are a few important ways in which pensions and savings accounts are different.
Personal pension or ISA?
The biggest difference between a personal pension and an ISA (Individual Savings Account) is that they each offer different tax advantages. There are also more restrictions on when you can withdraw funds from a pension when compared with an ISA.
The table below should give you an idea of how these products differ:
|Personal pension vs ISA at a glance:|
|Contributions are made before income tax is applied||Contributions are made after income tax|
|Withdrawals attract income tax after the first 25%||All withdrawals are tax free|
|Contributions are tax free up to £40k p/a||Contributions are tax free up to £20k p/a|
|No access before age 55||Instant access at any time|
Deciding which is best for your needs is an individual decision that depends on what matters most to you. For example, do you value having instant access to your retirement fund at any time in case of emergencies, or would you prefer to keep it locked away to where you won’t be tempted to dip into it early?
With an ISA, you’ll benefit from tax-free annual interest payments while you save, but unlike pensions, they don’t qualify for tax relief. In practice, this means that pensions usually result in stronger growth – and don’t forget you can put twice as much into a pension (£40,000) tax free as you can put into an ISA (£20,000).
Can I have an ISA as well as a personal pension?
Yes – you can certainly have a pension and an ISA at the same time.
There are certain advantages to ISAs that are worth considering in retirement, even if you already have a personal pension in place: e.g. ISAs don’t affect your entitlement to certain allowances you can claim in later life, and they don’t need to be recorded on your tax return.
An ISA is a really simple source of cash that can be withdrawn tax free at any time, which is likely to be handy in retirement. So by having an ISA as well as a pension you can enjoy the benefits of both.
Stocks and Shares ISAs share the same tax advantages with Cash ISAs. However, any money you invest in them can fall as well as rise – so you could end up with less than you put in.
Whether or not this is worth the potentially higher returns will depend on your own appetite for risk – but solely relying on such an investment would certainly be a very high risk strategy, so they are generally used alongside other long-term savings products.
Personal pension or Lifetime ISA?
A Lifetime ISA or LISA is a government-backed savings account intended for longer-term savings, which could be suitable for purchasing a home or funding your retirement. It offers a yearly government bonus worth 25% of your savings – but unlike a standard cash ISA it’s only available to those aged 18-39.
The cap on tax free annual contributions to a LISA is also significantly lower than the equivalent figure for pensions or ISAs.
For those who qualify, Lifetime ISAs share some similarities with personal pensions, for example they don’t offer instant-access. Access to your funds depends on what you’re saving for, so if used for retirement purposes, you can’t withdraw your savings until you reach 60.
Once you reach 60 you’re free to take unlimited amounts out of your LISA tax free.
|Personal pension vs LISA at a glance:|
|Personal Pension||Lifetime ISA|
|Tax relief paid on contributions equivalent to your income tax bracket (20%, 40% etc)||Yearly government ‘bonus’ paid at 25% the value of your savings|
|Withdrawals attract income tax after the first 25%||Withdrawals (in retirement) are tax free|
|Maximum contribution £40k p/a||Maximum contribution of £4k p/a|
|Start at any age before retirement||Only available to savers aged 18-39|
|No access before age 55||No access before age 60 – unless used for mortgage deposit|
Speak to an expert on personal pensions
Still not sure whether a personal pension is for you or which type you should go for? The experienced pensions experts we work with can help. Just make an enquiry or call us on 0808 189 0463, and we’ll be in touch soon to discuss your requirements.