Yet another pensions thread…increase work contributions or start SIPP?

I know there’s been tons of pension threads lately but thought I’d start a new one to avoid going off tangent on the other threads.

My current workplace auto-enrolled pension consists of me contributing 3%, with work contributing 5%. I’m becoming more conscious of my pension as I get older and also with all the news surrounding pensions at the moment. I’m in my late 20s so still have time on my side and want to put more into it now to try and take advantage.

My question is, would I be better increasing my workplace pension contributions and take advantage of the tax/NI relief, or to start a SIPP which I would have more control over which funds it is invested in but lose out on the relief? Not massively clued up on pensions so any advice welcome.

Depending on your current contributions (total amount and vs your earnings), i would expect you can claim tax relief on SIPP contributions too.  You should get 20% at the point of contribution with any further amounts claimed through the annual tax calculation if you pay more than basic rate tax and fill in a tax return.  As you note, the SIPP has advantages of diversification, flexibility and more control over the investments, but you need to have the appetite to manage your own investments.

Remember you could also have some control of where/what your company pension is invested in too!

In your 20’s, the company scheme will be directing funds towards growth rather than stability. As you near retirement age (like most of us), the investment funds switch to stability and away from stocks and share and into bonds and cash.

Personally, I would just continue in your company scheme if it’s administered by a well-known provider. If you would like a little more risk, you could put it in a tracker fund if offered by the provider. If not offered, and you are happy with a little more risk, then go for a SIPP tracker fund.

The forum pensions evangelist checks in…

Check whether your work will do any matching of additional contributions – many do. If so, upping your work contributions is a no-brainer. There’s also probably an NI saving if it’s done via salary sacrifice.

To be honest, upping your work contributions is a no-brainer anyway. Someone will be along in a minute to tell you to open a SIPP so you can actively manage your own portfolio and they’ve made a killing in Guatemalan cucumber futures yadda yadda yadda, but unless you’re actually going to be an active investor (and the overwhelming chances are you won’t), then it’s a waste of time.

Your age?

Your tax band?

Your employer?

Your health?

If you increase salary sacrifice you get a reduction in the national insurance contributions you make.  This is usually 2%.  You don’t get that in a SIPP.  Huh?  2%? Why is 2% important?  a) Because it is certain; b) because it might not be the whole story; your employer might offer something back on the employers NIC that they pay (proportion of 13.8%)

The other real benefit of salary sacrifice is that it is set and forget.  You don’t have to pay too much attention.  This is especially true if you’re a high rate tax payer as you don’t have to claim back the extra tax relief.

Next thing though is to look at  how the workplace pension is invested.  Usually you’re dumped into a default fund which is seldom the right answer for most people.  If you were investing through a SIPP you’d be making your own choices for investment, so this is no different.

Default funds across the pensions industry are set up to be moderate in all regards.  Why?  Because the industry has a regulatory responsibility to assess investors attitude to risk (ATR).  ATR is individual, so if you’re a company setting up a workplace scheme you’re not permitted to take excessive risks so, instead, everybody gets the moderate risk option…  but then we need to translate the industry’s definition of risk into you and me terms.  Risk in investing is all about volatility.  Stuff goes up and stuff goes down.  Non-risky is usually reserved to things which don’t go up and down… like cash.  But holding cash is actually “risky” because of inflation.  You will never beat inflation with cash.  So the things that go up and down the most (equities), evened out over a broad diversification and over a longer period of time do go up and beat inflation.  And that is without historical exception.  So the risky investment is actually the “safe” (go figure) investment… with a few caveats.

The caveats are: “longer term”: the market will drop from time to time and recovery from a drop might take months or a few years.  In most instances, you as an individual are ill-placed to determine if the market is going up or going down, so the behaviour that nets you the most certain beneficial outcome is to ignore the market and just keep tucking money way into your pension, into the same diversified investments.

The second and most important caveat is with how long you have to go until retirement.  This is because if the volatility strikes in the early years of retirement, you will be cashing out “distressed investments” and your retirement will suffer because of this.  So on the approach to retirement you need a plan (do your research and consider getting advice).

Once again, if you start a SIPP you’ll be making all these decisions.  You will underperform the market if you get sucked into “trading”, because 98% of actively managed funds underperform in the long term and you’re not a top 2% fund manager (after survivorship bias) on a run of luck.  So you need to park your money in something that (warning) will go up and down but if you hold it in the long term it will go up and outperform inflation.

So log into your workplace pension account (98% of people don’t ever do this) and see what it would take to change your investments to some sort of broadly diversified low cost ETF.  Think about what you’ll be happy investing in for the next 30 years (i.e. no single company; but a low cost index fund probably ticks the boxes).  Why 30 years?  Because if you’re miles away from retirement you have this much time anyway and if you’re closer to retirement, retirement isn’t the end of your investing (unless you take an annuity).  30 years is a good amount of time to think about and it gets you out of the mindset of thinking that this month, next month, last month have any significant importance.  They don’t.

Low cost does have an impact over 30 years.  Make sure the investment is low cost.

All SIPPs cost money.  The workplace pension charges a fee as well.  So think carefully about whether you want to pay for both and whether you have the discipline to put money away every month.  Set and forget is the winning argument for the workplace pension.  Just don’t forget it when you leave your job – that is the time to maybe consolidate that pension into a SIPP alongside any workplace pension from your new job.

Are you sure it’s you 3% and work 5%? Usually the other way around I think. Minimum employee contribution is 5%.

Nah.  Employer minimum is 5% these days.

i have a work pension, they match upto 10%, so i’ve always ensured max contribution from my employer,

i had a few older pensions that during covid seemed to be doing nolt and when i researched them prices were not available, so i setup a SIPP , i contribute a few hundred a month, for £200 a month you get £50 top up 60-65 days later, and if you pay high rate tax you can then claim the additional 20% (of £250) (assuming you have sufficient 40% tax contributions available)

for example if you invested £1k, you get £250 top up on sipp and then can reclaim another £250 in your tax return or if you are PAYE employee, then write a letter to HMRC and they will send you a cheque or bank transfer.

a proforma letter is available on martin lewis mse website, TIP: state gross contributions on letter (not net), as hmrc messed up my refunds (see earlier thread). and i had to reclaim again..

hence for £1,250 investment you’ll have paid over £1,000 and you can claim back £250

= for £750 you have £1250 in your sipp.

ps check fees as they are high than ISAs for example.

pps. have you a steady nerve, I’ve lost a sh1t tonne on stock market since thursday morning, everything has died.

all my stocks have recently issued good updates/profits, huge share buybacks and increased dividends..

ppps one advantage of the SIPP i’ve found is if you get a bonus from work, is you can lump in late march april into your sipp,

were as on a company pension, you have to submit form to put your bonus into your pension, before you know what it is

Nah.  Employer minimum is 5% these days.

It’s 3%, the employee minimum is 5%.

ps. if you do go down the sipp route, download the “Tip Ranks” app. its £150-300 per year sub, but i’ve found a work around on the free app version which allows viewing info on more than the max 3 stocks per day limit.

setup a portfolio, then you get message alerts for the latest broker recommendations and price targets.. click on the name and it’ll give the broker price target and rating (buy/sell/neutral) and other metrics

may as well follow broker recommendations [who in theory are the rich experts] to invest although it doesn’t help when everything crashes

It’s 3%, the employee minimum is 5%.

My mistake.  The other rule is that the minimum total contribution for auto-enrolled is 8%.  I’d been with my employer since before the rule and I paid 3% and they paid 6% which skewed my understanding.

may as well follow broker recommendations [who in theory are the rich experts] to invest

Nope. Diversified trackers with minimal charges are the best strategy for investing.

@kramer it has brokers recommends on ETFs too. one tracker isnt as good as the next tracker, minimal fees may not always get the best results.

despite them aiming to do the same thing, again IMHO it helps to follow experts

as always DYOR

 click on the name and it’ll give the broker price target and rating (buy/sell/neutral) and other metrics

What’s in it for the broker? They cynic in me is saying they’ll be tipping things to sell, as that drives the price down and they’re looking to buy, or tipping to buy, as that drives the price up and they’re looking to sell.

Diversified trackers with minimal charges are the best strategy for investing.

Correct. A ‘tip’ from a broker is not that different from a ‘tip’ from a bloke down the pub for the 3:10 at Epsom.

@IHN the broker has his/her client base, they do number crunching and research to pass this advise onto investors to earn commission, that app makes money from subscriptions to its app, it just holds data from all the majors like

citi / ubs / morgan stanley / kepler cap / DZ bank/ BOA / barclays / hsbc / RBC cap / jp morgan / jefferies / berenberg / goldman sachs / dbs/ deusche bank     .. et al

cant disagree with your comment “A ‘tip’ from a broker is not that different from a ‘tip’ from a bloke down the pub for the 3:10 at Epsom.”,

but if nine blokes all independent of each other told you a horse named ‘not a chance’ was going to win at epsom 310, would it peak your interest ??

and how do you think these tracker managers pick stocks?

yes, diversification matters..

and how do you think these tracker managers pick stocks?

Tracker managers don’t pick stocks, that’s the point of a tracker – it simply has the same makeup as the index it’s following, there’s no active management, which is why the fees can be so low.

You might be confusing trackers with actively managed funds, where, yes, the managers pick stocks that they think will do well, and 90%+ of the time they do worse in the long run than a tracker.

Very dodgy analogy, but an actively managed fund is a punter at Epsom, a tracker is the bookie…

and how do you think these tracker managers pick stocks?

Tracker managers pick stocks?  What does tracker mean then?

Edit: beaten to it by seconds.  IHN will you get out of here with your level headed well reasoned thoughts, this is a thread for wild claims a pyramid scheme would blush at (smiley smiley)

citi / ubs / morgan stanley / kepler cap / DZ bank/ BOA / barclays / hsbc / RBC cap / jp morgan / jefferies / berenberg / goldman sachs / dbs/ deusche bank     .. et al

If this lot are tipping to buy, and giving that tip to people who’s money they are not managing, they have stock to shift.

tracks the market, but a global tracker cannot own every stock in the world, it picks the best performing companies across regions and sectors.

I’ve a Standard Life Pension that is left-over form a previous job.  It lets me choose from wide range of managed funds to invest in, to meet my needs.  Also autoatically adds the 20% tax relief for any additional contributions I choose to make.    I’d assume the same would be the case if you opened one privately/independantly.

I ike it as it gives really good visibility of the funds you are invested in, and in turn where those funds are investing, and is clear about teh cost opf those funds.  (ililarly perfomring funds can cost  awide rance of % per annum).

But yes, look to max out any work contributions (they’ll often double up on employee contributions (3/6, 4/8, 5/10 percent upto a limit).

You may also be able to choose your risk profile within your workplace scheme – if I were in my 20’s again I’d put it in the highest growth/risk optiona possible and let it ride the wibbles in the market for the next 30 years, reducingt the risk profile as you get older.

See if work offer any pension planning sessions?  Larger employers often do.

how do you think these tracker managers pick stocks?

Tracker managers?  Passively managed ETFs largely replicate the index holding (and it is this that makes them good ones).  There is no-one calling “Buy! Buy! Sell! Sell!”.  They run a system of staying inline with the indexed securities coping with fund inflows and outflows.

It is a doddle to find index ETFs that track their respective index.  It is a doddle to find a diversified index that trends upwards because the market has trended upwards for over a hundred years.  The counterargument to “trading” is that most traders do not beat market indices.  In a thread about pensions started by an OP whose decision is about whether to pile in more on a workplace pension vs a SIPP, I’m not sure what the tipster vs ETF discussion is adding.

I’ll just leave this here

https://www.hartfordfunds.com/practice-management/client-conversations/managing-volatility/timing-the-market-is-impossible.html

As I think had been mentioned above I don’t think you need to sacrifice the tax relief by getting a SIPP, you would get a percentage automatically and then can claim any additional higher rate.

As has also been mentioned above look into what options you have for selecting funds for your workplace pension to invest into if that’s enough to scratch the control itch.

Then also, I think some workplace pensions allow you to transfer out into a SIPP really easily, so you pump money into the work scheme in the 1st of the month say, saving all the tax and NI at source, then sweep it out into the SIPP almost immediately each month

I use a workplace one with Scottish Widows, it’s on salary sacrifice, so all the hard work is done by employer.  I can vary the amount I put in monthly, and the tax all sorts itself out (higher rate taxpayer).  I aim to max out my contributions whenever I can. Annually I empty it all, bar a few quid to keep it open and working, into a managed SIPP, with Investec.  This has much better performance than the Scottish Widows scheme, though fairly hefty fees too.

tracks the market, but a global tracker cannot own every stock in the world, it picks the best performing companies across regions and sectors.

Honestly, that’s not how it works

ok, I’m no expert @IHN i guess i’m mixing up ETFs ucits and other tracker index style stocks.

we all have different attitudes to risk, i’ve got plenty of time to retirement so happy to buy individual stocks and shares, plus i’m only putting in what I’m prepared to lose. had a few dogs, but seeing good compound growth now from mainly dividend stocks.

tracks the market, but a global tracker cannot own every stock in the world, it picks the best performing companies across regions and sectors.

as per IHN, that’s really not how it works. It picks a sample (usually a good majority) of stocks that the fundmanager best thinks will track the chosen index (the tracking error will be in the information provided…somewhere)

To the OP – I would research the quality of your workplace scheme, default investment choice, composition of default choice, costs (should be 0.3% or lower TCO).

If there are self select options, are you happy with them? (a global index fund should be a minimum, IMO)

If you are satisfied then sticking with your workplace scheme is probably the sensible choice for the majority of people.  It doesn’t mean it’s there forever – you can make a full or partial transfer to another scheme / SIPP at a later date.

My workplace one is with aviva and I have the choice of lots of different funds. As it happens I stuck with the default fund as it looks fine (circa 80% equity and no home bias) and fees are competitive. Can’t see any advantage in moving to a SIPP and having to mess around claiming tax relief etc.

To the OP – I would research the quality of your workplace scheme, default investment choice, composition of default choice, costs

Very much this. I know my workplace scheme has a fee discount which means it good value. Plus they match up to 10%. Limited range of funds but still some good performers.

I get very low fees on my workplace pension, so have a look at the total fees if you have an additional SIPP.  Mine is a standard life one and does allow certain flexibility. Old Scottish widows one (same employer) had pretty high fees.  These things at up over time.

Many company schemes allow 1 transfer a year out to a SIPP so if you are not happy with your company scheme this an option to consider

Slightly against the normal recommendations but do you actually want it all in a pension? A lot can happen between now and your retirement. Changed to tax rules, retirement age, personal circumstances, etc. While not quite so tax efficient I think it’s still worth having some more accessible savings. Put some in a stocks and shares ISA and you can still save it until retirement or access it earlier for emergencies, buying a house, retiring early. If you already have this then crack on with the pension.

Whilst we’re on this topic – is there a decent online calculator that you can play with varying your amount you pay into a Pension and the effect on your net take home pay? Presumably the more you pay into a pension, the more tax you avoid therefore it’s not quite a 1:1 ratio in reduction in take home pay…

@scruff9252 – there’s one on the Money Saving Expert website.

Thanks all for suggestions so far.

My provider is Aegon and its currently being paid into a “universal lifestyle collection” fund, which appears to be classed as an average risk with 70% of it going into a diversified fund. 1.03% charge.

Based on the comments here, I’m thinking of moving it to a higher risk fund (If aegon will let me) and increase my work pension contributions as I’m not sure if I’ll have the time or knowledge to actively manage my funds if I move it to a SIPP. Then I can move it to a lower risk fund when I’m nearing retirement.

1% charge is huge!

have a look around as to what the likes of Vanguard would offer! You can pay into your workplace pension via salary sacrifice for the tax benefits then once a year, sweep it into a SIPP to reduce on fees.

A podcast that’s really quite good and I found on here is the Meaningful Money podcast. Well worth a browse through Pete’s back catalogue and listing to a few that seem appropriate to your needs

I was recently offered a workplace pension. At the same time work moved to salary sacrifice, but offered to pay into work scheme or any scheme of our choice.

I did some research.

I decided to stay with my Standard Life Stakeholder with 0.8% fee. It gives me lots of choice of funds, which I check quarterly and have actively shuffled a few times. It’s a reasonable performer. It’s an ethical be wrapper, so the funds I’ve got access to are broadly better ‘for the world’.

I’ve now upped my contributions above what work will match maximum, which being salary sacrifice have reduced my tax burden.

I didn’t want two different pensions with twice the faff factor, particularly when one *just works* and it’s working over the 15-20 years I’ve had it.

I decided to stay with my Standard Life Stakeholder with 0.8% fee.

That’s a lot.

But the alternative was the same amount. 0.8%.

What would a good fee look like?

As a pensioner, I’d add this into the discussion.

It’s nice to have a good pension pot to look forward to, but I’ve known so many people who’ve given up so much that they may have enjoyed, and which would have enriched their lives in order to get a good pension “we’re waiting till we’re retired and we’re going to have all these adventures” and who’ve conked out or become frail before they’ve had the opportunity to enjoy it.

And you can get by on a lot less once you’ve retired.

Get it done now.  Never leave your widow regretting all the things you didn’t do.