When it comes to planning for retirement, there are many options to choose from. One key choice is whether to set up and contribute to a SIPP (Self-Invested Personal Pension) and a company pension scheme. Both offer tax-efficient ways to save for retirement, but which one is most suitable for you?
The answer depends on what your employer offers as a workplace scheme, how much they are willing to contribute to your pension, and which is easier to manage.
What is a SIPP?
A SIPP is a type of pension scheme that allows you to fully control how it is managed. It is a flexible, tax-efficient way to save for retirement and can be used to invest in a wide range of assets such as stocks, bonds, and cash. With a SIPP, you can take advantage of tax relief on contributions, as well as being tax sheltered from paying as any growth in value of your investments.
You can read further into this topic in our more detailed post on What are SIPPs.
What is a Company Pension Scheme?
A company pension scheme is a workplace pension scheme set up and administered by an employer. It is a tax-efficient way to save for retirement, as contributions are deducted from your salary before tax is taken. The employer also makes contributions to the scheme, and these are tax-deductible.
One of the most common and cost-effective ways of setting up a workplace pension is to use NEST, which is a scheme set up by the government. It is low-fee, straightforward and has a positive track-record for good retirement outcomes. If you need us to set up a workplace pension scheme for your business, this is the route we will generally recommend.
Auto-enrolment - when are you legally required to have a workplace pension?
Every employer in the UK has a legal requirement to have a workplace pension scheme in place and to contribute to it for their employees, except if all the employees are either not legally entitled to a workplace pension or choose to opt out of the scheme.
The full details of rules and exceptions can be found in HMRC's guide to Workplace Pensions.
We'll get into more detail about this in the pros and cons sections below, but the short answer is that for most business owner employees, you would choose to opt out of the scheme and instead of dealing with the admin and compliance of setting up a workplace pension, you would set up a pension that best suits your specific circumstances.
The benefits of SIPPs compared to workplace pensions
The key benefit is higher flexibility and control.
- You can choose the investments you make, and you can easily move your money between different investments.
- You can choose the SIPP provider whose fee structure is the lowest cost for your size of pension pot.
- You can consolidate previous pension schemes into one place and lessen the administrative burden.
There is an enormous amount of choice between SIPP providers, so we do advise exercising care when selecting a provider or asking for help. You will be able to find SIPPs which are cheaper than workplace pensions, but there are also many out there which are more expensive.
The benefits of workplace pensions compared to SIPPs
The key benefit is that someone else handles it for you. For owner-employees, this is instead a drawback.
- Your employer handles the set-up and admin of your pension
- Your employer is legally required to contribute to your pension
- Workplace pensions are subject to rules limiting the fees you can be charged
In general, workplace pensions have lower fees than SIPPs, which when you consider how long your pension investments are going to be accruing fees, adds up. Saving as little as 0.5% on per year on fees over 30 years gives you a pension pot that is 16% higher.
How to choose between SIPP or Workplace Pension?
Here are the factors for deciding in order of importance.
How much are your employer pension contributions?
An employer can contribute to its employee's pension scheme, regardless of whether the employee has a pension via the employer's workplace pension or their own SIPP. However, while contributing to a workplace pension is a legal requirement, contributing to your SIPP is at the employer's discretion.
If you are the owner, then these two options look the same, as you will be happy to contribute to either. If you are non-owner employee, then it depends on if your employer would contribute differently to your SIPP. If they would not contribute to your SIPP, then you would most likely choose the workplace pension.
Employers contributions save Corporation Tax and National Insurance
The reason employer contributions are so important, is because employer pension contributions:
- Are allowable expenses that reduce their Corporation Tax,
- No Employer National Insurance payable, and
- No Employee National Insurance payable
Taking a lower salary in return for higher employer pension contributions is one of the most tax efficient ways to remunerate yourself from a Limited company.
Fees matter for long term investing
A pension is likely to be invested for many decades, which also means that it will accrue fees for a long time. This is one of the most important factors in your choice.
To illustrate the point: you can access the exact same investments from different providers but what you will pay in fees can vary by as much as one or two percent. That may not sound like much, but saving as little as 0.5% in fees oer year, would give you a pension pot at the end of 40 years which is 22% higher.
For almost all individuals, you will be able to find a SIPP which is lower cost to you than the equivalent workplace pension. Costs can be complex to navigate because of a wide range of fees: transactions fees per trade; custody and platform fees which are often tiered based on the size of your pension pot; fees on contributions and transfers in, all amount to different fits for different people. We have the expertise in-house to give you guidance on navigating this, but a great starting point is the Cheapest SIPP guide on MoneySavingExpert which is frequently refreshed.
If you have few employees, then managing your SIPP and letting your employees set up their own SIPPs, is likely a time-efficient way to handle pension arrangements, compared to running a workplace pension.
At a certain point, once you have many employees, this policy may start to create challenges, if you have employees reluctant to manage their own SIPP. However, the reality is that managing a SIPP is usually in most individual's best interests, so with the right communication in place, you can make this work.
Accounting for ecommerce business owners
Did you know that one of our parters is a Qualified Chartered Wealth Manager? We're not only experts in ecommerce... we are looking to help the owners and individuals behind these business to thrive. We are very keen to see people make well-informed financial decisions that benefit them the most in the long-run. If you ever have a question on the topic or need help setting up your business' company pension, get in touch.