SIPPs vs Traditional Pension Schemes: Exploring Main Differences

Millions of adults in the UK have embraced investing in some form, with varied financial goals and risk appetites. But investing in our pensions feels like an entirely different ball game, where the stakes are higher, and margins for error are much lower. But could self-invested personal pensions (SIPPs) be the perfect hands-on solution supporting our retirement planning? 

While traditional pension schemes are largely passively managed funds that often provide more limited investment choices that suit ‘set and forget’ savers, SIPPs are fast emerging as a more functional alternative to support higher levels of control. 

Last year, SIPP ownership passed the six million mark, with a total of almost £650 billion invested in assets. 

The rise in popularity of self-invested personal pension schemes comes at a time when financial literacy tools in the UK have never been more accessible, helping to support a new generation of savvy investors who have the capabilities to pick and choose their portfolios to suit their goals and risk appetite. 

But what are the key differences, both good and bad, that separate SIPPs and traditional pension schemes? Given that our pension pots are likely to be the most important investments we ever make, getting a plan together that assists us best for later in life is of the highest importance. 

With this in mind, let’s take a closer look at how self-invested personal pensions and their traditional counterparts differ when it comes to retirement saving: 

More Control

One of the best advantages that SIPPs provide pension savers is the freedom to pick and choose the specific assets to fill your portfolio. 

Many pension savers opt for self-invested personal pensions because they gain the responsibility for building, monitoring, and managing their investments. 

However, control on your terms also means that you have the freedom to shape how hands-on your SIPP is. This means that you can opt to build your portfolio by hand or choose private pensions that are managed on your behalf, based on your financial goals. 

Opening a managed private pension means that you can share your financial goals with a team of experts who can then shape your portfolio based on your risk appetite and ethics. This can pave the way for a pension that matches your style without having to constantly go back and reassess your assets. 

On the other hand, traditional pensions are often ready-made and are managed in their entirety by the provider. While this can certainly suit passive savers, there’s generally less room to shape pension pots in the style of the account holder. 

Greater Choice

Another major advantage of SIPPs is that they can accommodate a vast range of investment options, including both international shares and those located within the United Kingdom. As a SIPP holder, you’ll also benefit from access to investment trusts, exchange-traded funds (ETFs) and even commercial property for the best access to diversification. 

This level of choice isn’t replicated within traditional pensions, and savers are generally limited to a managed list of funds that are selected by the provider. As a result, traditional pension holders will need to place their trust in the funds used by the company that manages their pot. 

Ease of Consolidation

It’s also much easier to use a self-invested personal pension to consolidate multiple old pensions from previous employers. This is because SIPPS allow a wider range of assets to be moved with a higher degree of flexibility in contributions and retirement income options, such as income drawdown. 

For traditional pensions, the outlook for consolidation is more rigid. Although they still offer the standard 25% tax-free withdrawal advantages for investors, they can be considerably less flexible than SIPPs when it comes to complex retirement income planning, making them less appealing for consolidating your old pensions. 

Flexibility at a Cost

Despite offering higher degrees of flexibility and control for investors, SIPPs do generally come at a higher cost than traditional pensions. This is because private pensions provide access to a wider range of options, with charges often including set-up fees, administration charges, and dealing fees. 

Despite this, some SIPP providers can offer access to low-cost managed pensions for more peace of mind, but it’s always worth conducting your due diligence over their past performance and capabilities. 

Traditional pensions are often cheaper when it comes to management fees, which are generally based on a percentage of the total pension pot. Because of this, they’re likely to be more cost-effective for smaller pots. 

What’s the Best Pension? 

There’s nothing wrong with opting for either a SIPP or traditional pension scheme based on your needs, but it’s certainly worth assessing your situation and financial goals before deciding on what type of pension is best for you. 

Keep in mind how hands-on and selective you want to be with the stocks you choose, as well as the fees associated with opting for a more tailored pension pot. 

By taking a moment to understand what you’re looking for ahead of your retirement, you’ll be able to rest assured that your savings are working towards your ambitions for later life, whatever they may be.