If you already have a salary sacrifice pension from your employer, is there anything to gain by moving to a SIPP?

AJ Bell podcast listener  

Tom Selby AJ Bell Senior Analyst says:

Before answering it’s probably worth quickly explaining what salary sacrifice is and how it works in relation to a pension.

Salary sacrifice is simply where an employee and an employer agree to reduce the employee’s salary and the employer pays the difference somewhere else. Employers like this because it allows them to save on National Insurance (NI), while employees can reduce both their NI and income tax bills.

Salary sacrifice can be done for a variety of things including childcare vouchers, buying a bike to travel to work (often referred to as the ‘bike to work’ scheme), work-related training and paying into a pension.

Instead of you paying a pension contribution from your take-home pay, your employer will reduce your salary and pay the difference into your pension. This means you will end up with the same overall amount going into your pension but a higher take-home pay.

There are some situations where salary sacrifice isn’t beneficial, for example very low earners. There may also be implications for claiming benefits if you choose to reduce your salary.

Is it worth setting up a SIPP alongside a workplace pension?

If you are employed, your workplace pension should be your first port of call for retirement saving as it benefits from both an employer contribution and tax relief.

However, the minimum contributions under automatic enrolment are just 8% of earnings between £6,240 and £50,000 for 2020/21.

Given that a very rough rule of thumb suggests you should aim to save around half the age you first joined a pension scheme as an annual percentage of your salary in a pension in order to build a decent retirement fund, for most people 8% will not be enough.

If you can afford it and don’t have any high cost debts you need to pay off, you may therefore want to save over and above the amount offered by your employer scheme. If you do choose to go down this route, a SIPP could be a good solution for a number of reasons.

SIPPs deliver exactly the same tax advantages as a salary sacrifice workplace pension and will likely give you greater choice over your investments (workplace pensions are usually limited to a ‘default’ fund and a few other funds chosen by your employer). You can also set up regular contributions to a SIPP so you get into the habit of paying the same amount in every month.

If you do choose to save in a SIPP alongside your workplace pension, it is important to make sure you are comfortable with the investment risk you are taking and keep your costs as low as possible, as even small differences in charges can add up to thousands of pounds over decades.

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