Projects
Workplace pensions and SIPPs, explained without the jargon
Everyone tells you to pay more into your pension. Almost no one says it shouldn't be the first thing you do with spare money.
The three layers, in three sentences
- The State Pension is the floor: built up through National Insurance contributions, it needs 35 qualifying years for the full amount.
- Your workplace pension is close to compulsory: if you're 22 or over and earn above £10,000 a year, your employer must auto-enrol you and pay into it.
- A SIPP (Self-Invested Personal Pension) is voluntary and self-directed — the one you actually choose to open, and the one this article is mostly about.
What it actually earns you
The main advantage isn't investment growth, it's tax relief. Every £80 you pay in becomes £100 in the pension — the government adds the other £20 as basic-rate relief automatically. Pay higher-rate tax, and you claim back another £20 through Self Assessment, so that same £100 in your pension can end up costing you only £60.
⚠ But the money is locked. You can't normally draw a pension before age 55 (rising to 57 from April 2028), aside from narrow exceptions such as serious ill health. That's the price of the tax relief.
Why it isn't the first box to tick
Never opt out of the auto-enrolment minimum — that's an employer contribution you'd be turning down, which is simply pay you're refusing. But paying in extra, through a SIPP or additional workplace contributions, is a different decision, and it comes after, not before, an emergency fund and any expensive debt is cleared.
The order that holds up: a month of spending set aside, expensive debt gone, three months of reserve — then extra pension contributions.
Workplace pension or SIPP?
Workplace pension
Low fees, minimal admin, and an employer contribution on top of your own. The obvious default while you're employed.
SIPP
You choose the provider and the investments. Mainly worth opening if you're self-employed with no workplace scheme, or consolidating old pension pots.
With an employer already matching contributions, there's rarely a reason to add a SIPP on top before you've used up what the workplace scheme offers for free.
How much to pay in
The auto-enrolment minimum is 8% of qualifying earnings (at least 3% from your employer). The annual allowance for extra contributions is £60,000 or 100% of your earnings, whichever is lower — a ceiling, not a target. Pay in what you can spare beyond your reserve, even £50 a month; a single top-up before the tax year ends works just as well if your income is irregular.
Common questions
What is a workplace pension for?
It's a retirement pot built from your own contributions, an employer top-up, and tax relief — and for most employees it's close to automatic once you're auto-enrolled.
How much does pension tax relief actually earn you?
Every £80 you pay in becomes £100 in the pension through basic-rate relief. Higher-rate taxpayers can claim a further £20 back through Self Assessment, cutting the real cost of that £100 to £60.
What's the pension contribution limit?
The annual allowance is £60,000 or 100% of your earnings, whichever is lower, for most people — it tapers down for very high earners.
Can I access the money before retirement?
Not normally. The normal minimum pension age is 55, rising to 57 from April 2028, with narrow exceptions such as serious ill health.
Should extra pension contributions come first?
No — but never turn down the auto-enrolment minimum, since that forfeits free employer money. Extra contributions come after an emergency fund and expensive debt are dealt with.
Workplace pension or SIPP?
The workplace pension by default, since it comes with an employer contribution. A SIPP mostly makes sense if you're self-employed with no workplace scheme, or consolidating old pots.
You might also like
Projects
The emergency fund: how much, where, and in what order
Three months of spending, they say. How to work out your number, where to keep it, and why it comes first.
See what you can actually spare
Know what's left each month before you commit any of it long-term.
Download MonniFree to start · No account · No bank connection