SIPP vs Personal Pension: Which Is Right for the Self-Employed

Two Pension Options, One Goal

When you are self-employed and ready to start saving for retirement, you will quickly encounter two main options: a Self-Invested Personal Pension (SIPP) and a standard personal pension. Both are pension wrappers that give you tax relief on contributions and tax-free growth. The difference lies in how much control you have over the investments inside them.

Understanding this difference is important because the right choice depends on your investment knowledge, the size of your pension pot, and how hands-on you want to be.

What Is a Personal Pension?

A personal pension is a pension product offered by insurance companies, banks, and financial advisers. You make contributions, receive tax relief, and the provider invests your money in a range of managed funds.

How It Works

• You choose a provider and open an account
• You select from a range of ready-made funds (typically categorised by risk level: cautious, balanced, adventurous)
• The provider manages the fund on your behalf
• You can usually switch between funds at any time
• Contributions receive tax relief automatically (basic rate) or through your Self Assessment (higher rate)

Advantages

• Simplicity — choose a fund and let the provider manage it
• Low barrier to entry — many accept contributions from £25 per month
• Suitable for beginners — no investment knowledge required
• Default options — most providers offer a "default" fund designed to be appropriate for the majority of savers
• Regulated protections — stakeholder pensions (a type of personal pension) have fee caps and minimum standards

Disadvantages

• Limited investment choice — typically 20-50 funds to choose from
• Higher fees — some providers charge 1% or more per year in management fees
• Less control — you cannot invest in individual shares, bonds, or specific assets
• One-size-fits-all — the funds may not perfectly match your risk appetite or investment views

What Is a SIPP?

A SIPP is a type of personal pension that gives you much wider investment choice. Instead of being limited to a small range of managed funds, you can invest in:

• Individual stocks and shares (UK and international)
• Exchange-traded funds (ETFs)
• Investment trusts
• Government and corporate bonds
• Commercial property
• A wider range of managed funds

How It Works

• You open a SIPP with an investment platform or specialist provider
• You make contributions (same tax relief as a personal pension)
• You choose your own investments from the platform's range
• You manage your portfolio — buying, selling, and rebalancing as you see fit
• Many SIPPs also offer ready-made portfolios if you want a middle ground

Advantages

• Investment freedom — access to thousands of investment options
• Lower ongoing costs — platform fees are often lower than traditional personal pension fees, especially for larger pots
• Control — you decide exactly where your money is invested
• Tax-efficient investing — combine tax-free pension growth with low-cost index funds for maximum efficiency
• Transparency — you can see exactly what you own and what it costs

Disadvantages

• Requires investment knowledge — or willingness to learn
• Time commitment — you need to monitor and manage your investments
• Risk of poor decisions — without guidance, you might make costly mistakes
• Trading costs — buying and selling individual investments may incur dealing charges
• Complexity — more options means more decisions

Comparing Costs

Costs are critical in pension saving because they compound over decades. A 1% difference in annual fees can reduce your final pot by 20-25% over 30 years.

Typical Personal Pension Costs

• Annual management charge: 0.5% to 1.5%
• No dealing charges (included in the management fee)
• Some providers charge exit fees or switching fees

Typical SIPP Costs

• Platform fee: 0.15% to 0.45% per year
• Fund ongoing charges: 0.05% to 0.50% (for index funds/ETFs)
• Dealing charges: £0 to £12 per trade (many platforms now offer free dealing)
• Total typical cost: 0.20% to 0.80%

For pots above £50,000, a SIPP with low-cost index funds is often significantly cheaper than a traditional personal pension.

Which Is Right for You?

Choose a Personal Pension If:

• You are new to investing and want simplicity
• You prefer someone else to manage your investments
• Your pension pot is small (under £20,000)
• You do not want to spend time on investment decisions
• You value having a default option that works without intervention

Choose a SIPP If:

• You are comfortable making investment decisions (or willing to learn)
• You want to minimise fees
• Your pension pot is growing (above £20,000-£30,000)
• You want access to specific investments (index funds, ETFs, individual shares)
• You enjoy having control over your money

The Middle Ground

Many modern SIPP providers offer ready-made portfolios alongside the full SIPP functionality. You can start with a ready-made portfolio (similar to a personal pension) and gradually take more control as your confidence grows.

Tax Relief Is the Same

Regardless of whether you choose a personal pension or a SIPP, the tax relief is identical:

• Basic rate: 20% relief added automatically
• Higher rate: additional 20% claimed through Self Assessment
• Additional rate: additional 25% claimed through Self Assessment
• Annual allowance: £60,000 (2025/26)

The pension wrapper does not affect the tax treatment — only the investments inside it differ.

For Self-Employed People Specifically

Self-employed income often fluctuates, which affects pension strategy:

• Variable contributions — both SIPPs and personal pensions allow you to vary your contributions. Pay in more during good months and less during lean ones.
• Lump sum top-ups — at the end of a profitable year, make a lump sum contribution to use up annual allowance and reduce your tax bill.
• Carry forward — if you did not use your full annual allowance in the past three years, carry it forward for a larger contribution in a good year.

How Accounted Supports Pension Planning

Accounted does not manage your pension directly, but it gives you the financial clarity to make smart pension decisions:

• Real-time profit tracking — know your income throughout the year
• Tax band awareness — understand your marginal rate for tax relief calculations
• Year-end planning — see how a pension contribution would affect your tax bill
• Self Assessment support — claim higher rate pension tax relief correctly

Visit our pricing page to learn more.

---

Whatever pension you choose, knowing your numbers is the first step. Sign up for Accounted and let Penny give you the financial clarity to plan your retirement.