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What is the difference between a pension and a SIPP?

Everyone wants to make sure they have decent savings and investments for their retirement. It is great you are diving deep into the different schemes to find out which one is the best for you! Let us help you understand the details, and we also recommend brokers to you that take care of your investments. 

The key difference between a pension and a Self-Invested Personal Pension (SIPP) is flexibility and control. What are the key differences? 


  • With traditional personal pensions you are not in control how your money is being invested
  • With a SIPP, you can choose and manage your own investments
  • With SIPP, you need to be financially savvy to manage your investments, or willing to pay someone to do it
  • SIPPs can offer wider investment options than other private pension types


Besides the state pension, in the cases of the workplace pension (provided by an employer), and the personal pension schemes, the individual contributes a portion of their salary to the pension fund. The pension fund is then invested in a range of assets, such as stocks and bonds, by professional fund managers. 

In contrast, a SIPP is a type of personal pension that allows you to choose and manage your own investments. It means a greater choice of investments and greater control over your retirement savings. However, this also means that you take on more risk.

What is the difference between a pension and a SIPP?
How do UK pensions work?

For UK taxpayers, there are different layers of pension schemes available – from the state one to the completely do-it-yourself SIPP ones. Let’s see the details!

State pension

For UK taxpayers, the state pension is given based on the years worked and is currently around £9,600 per year. You cannot take that money until you are 66 (with the age limit expected to rise in the future). If you want a larger income for your retirement years, you will have to start saving or investing on the side. The UK government gives tax benefits for you to do that. 

Workplace pension

Many people enrol in a workplace pension scheme arranged by their employer. In this case, a percentage of your salary is taken from your pay and put into the pension scheme every month. In most cases, your employer also contributes money, and the government adds money too in the form of tax relief. However, this is not accessible for everyone, for instance, self-employed people, those who don't work, or who work outside of the UK. 

Personal pension

For those people in particular, but for anyone who wants to top up their pension pot, a private pension (often called a personal pension), or a Self-Invested Personal Pension (SIPP) can offer tax-efficient investment options.

Private pension schemes are a product by banks, or insurance companies, where you pay regularly or in one-off payments into your personal pension plan. The provider, the pension fund manager, then invests that money on your behalf in a range of assets (like bonds, shares, property) of their choice, depending on your level of risk tolerance. Eventually, the value of your retirement pot will depend on how much you have paid into the scheme and how well the investments performed. 

SIPPs are different from other private pension plans in that you control what you invest in, when and how. (Or you can also choose to pay a financial adviser to take care of managing investments on your behalf.)

In both cases, private pension pots are accessible earlier, at the age of 55. And the government adds to your pot too. For example, basic-rate taxpayers get 20% pension tax relief from the UK government. This means that every £80 you contribute is topped up to £100. High-rate taxpayers (earning over £50,00 per year) can reclaim an additional 20% tax on their pension contributions, making it a total of 40% tax relief. However, you have to actively claim this yourself. Besides the top-up, the government says you only pay tax if savings in your pension pots go above 100% of your earnings in a year, or £40,000 a year. 

When you turn 55, you can take up to 25% of the money built up in your pension as a tax-free lump sum. You’ll then have 6 months to start taking the remaining 75%, which you’ll usually pay tax on. Your pension provider might charge you for withdrawing cash from your pot.

What is the difference between a pension and a SIPP?
What are the advantages of a SIPP?

  1. Flexibility and control: With a SIPP, you have more control over your retirement savings, as you can choose how and where to invest your money. This flexibility allows you to tailor your investments to your specific financial needs, goals, and risk appetite.
  2. Tax relief: Contributions to a SIPP are eligible for tax relief, meaning that the government adds money to the pension pot for every contribution you make. This can significantly boost the amount of money that you have in your pension fund.
  3. Investment options: SIPPs offer a wide range of investment options, including stocks, shares, funds, and commercial property. This means that you can choose investments that align with your interests, values, and investment goals.
  4. Lower costs: Low-cost SIPPs are available, which can be an affordable way for you to invest your pension funds. These low-cost SIPPs typically have limited investment options, but they can be a good choice for individuals who want to keep costs down.

What is the difference between a pension and a SIPP?
What are the disadvantages of a SIPP?

  1. Higher risk: Investing in a SIPP carries more risk than investing in a traditional pension, as the value of investments can fluctuate, and there is no guarantee that you will get back the amount they invested. This means that you need to be comfortable with managing your own investments and understanding the risks involved.
  2. Complexity: SIPPs can be complex, and you need to have a good understanding of investment principles, financial markets, and tax regulations to make informed investment decisions. For those who are not confident with managing their own investments, a SIPP may not be the best option.
  3. Fees and charges: SIPPs can be more expensive than traditional pensions, as they may charge fees for investments, administration, and advice. It is important to understand the fees associated with a SIPP before opening one, as these costs can impact the overall returns on investment.
  4. Limited access to funds: Unlike traditional pensions, which may allow individuals to access their funds earlier, a SIPP cannot usually be accessed before the age of 55, except in specific circumstances, such as ill health or death. This means that you need to be comfortable with locking your money away for a long period of time.

In short, SIPPs can be a good top-up to state and workplace pension schemes, if you have maxed them out, but you need to be financially and to some extent digitally savvy (as you will manage your investments through online financial platforms) to make it work for you.


Whichever you choose, we want to congratulate you on taking the first step toward financial independence and responsibility! Our expert team here at BrokerChooser specialises in making sense of a complicated financial world. We have done all the work for you, saving you hours of research, and reviewing brokers based on BrokerChooser's unique methodology.

If you have any feedback or questions, feel free to contact us via email!

Author of this article

Eszter Zalán

Author of this article

Eszter is a Brussels-based content editor and writer with over 15 years of experience in journalism. She thrives in researching complicated issues and explaining their essence in plain and clear language to guide you through the world of finance.

Eszter Zalán

Content Editor

Eszter is a Brussels-based content editor and writer with over 15 years of experience in journalism. She thrives in researching complicated issues and explaining their essence in plain and clear language to guide you through the world of finance.

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