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Ross asks: I am 32 years old and currently putting money into a SIPP every month. It has grown so far to a reasonable, but not huge, sum. Should I concentrate on adding as much money as possible to the SIPP or should I start an ISA? My main concern is that I would be starting at £0 in the ISA, meaning my contributions would have to work hard to catch up with my SIPP. There is no company matched pensions contributions scheme through my employer, so there is no additional benefit paying into my workplace stakeholder pension.
Kyle Caldwell (pictured above), Collectives Editor, interactive investor, says: A self-invested personal pension (SIPP) or an individual savings account (ISA) doesn’t need to be an ‘either/or’ choice. But if you are weighing up the two, your approach very much depends on whether you are investing for retirement or for another pre-retirement purpose.
If for retirement, SIPPs are almost always better than ISAs because of the instant tax relief. If it’s for something else prior to retirement, an ISA will usually be better. Either way, it is important to get to grips with their respective advantages and drawbacks.
ISAs offer much more flexibility – you can withdraw from them whenever you like. This is when an ISA is more suitable than a SIPP for saving towards a goal, such as a new car or school fees.
With a SIPP, on the other hand, money cannot be withdrawn before the age of 55 – rising to 57 from 2028.
For both ISAs and a SIPP, all income and capital gains on investments grow free of tax. Both offer a wide variety of investment options – shares, funds, investment trusts and exchange-traded funds.
With SIPPs, you get the tax benefits up front. There’s full tax relief on all your contributions, with basic-rate tax (20%) automatically reclaimed and paid into your pension. Higher-rate taxpayers (at either 40% or 45%) can reclaim another 20% or 25% through their tax returns.
Over a long time frame, that extra money invested in the SIPP makes a massive difference due to the power of compounding.
With an ISA there is no tax relief up front. That means there is less money overall being invested. However, withdrawals are completely free of tax. At retirement, this can be a valuable benefit when you might want to boost your income but avoid tipping over into a higher tax bracket.
In contrast, withdrawing income from a SIPP is taxable. But bear in mind, at retirement you may be in a lower tax band compared to during your working life. Therefore, you could be a higher-rate taxpayer during your working life when putting money into a SIPP (benefiting from a 40% or 45% uplift from the government) and then at retirement a basic-rate taxpayer (only paying 20% income tax when taking money out of the SIPP).
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Important information – SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial adviser before making any decisions. Pension and tax rules depend on your circumstances and may change in future.
Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.