SIPP vs ISA
Find out more about the main differences between SIPP and ISA and make smarter decisions for your future
ISAs and SIPPs are both tax-efficient ways to save for the future, but there are clear differences between the two. It is important to research and find out which is the best option for you. Of course, as long as you are 18 or over, there is nothing to stop you from having both.
A SIPP is a type of pension that allows you to take control of your retirement saving. You can choose what to invest in, including shares, funds and trusts. It has an annual allowance of £40,000 gross (or 100% of your earnings), and you receive tax relief on your contributions. SIPPs provide benefits on retirement based on the amount of money that has been paid in to the scheme, how long it has been invested, the level of charges and investment returns. SIPPs are designed to be long-term investments, and you will not be able to access your pension pot before the age of 55 (57 from 2028).
Stocks and Shares ISA
A stocks and shares ISA is a tax-free savings account. Unlike a cash ISA, a stocks and shares ISA allows you to choose what you invest your money in. There is an annual allowance of £20,000, which can be split between a number of different products, including cash ISA, stocks and shares ISA and Lifetime ISA. You can take money out of your stocks and shares ISA at any time and will not be charged tax on your withdrawals but you will not receive any tax relief on your subscriptions.
A lifetime ISA is a tax-free savings account available to investors aged between 18 and 39 years old. The aim is to help savers to plan for retirement, or buy their first home. You can invest up to £4,000 per year, and the Government will pay a 25% bonus on your subscriptions, up to a maximum of £1,000 per year. You can make subscriptions to your lifetime ISA until you are 50. However, you can withdraw money only if you are buying your first home, retiring or terminally ill with less than 12 months to live. Otherwise you will have to pay tax at 25% on your withdrawal.
What tax relief will I receive?
ISAs and SIPPs both help to protect your savings from taxes, but the features are different. The main advantage of a SIPP is that you receive tax relief of 20% on your contributions (or 40% for higher rate tax payers), up to your annual limit. This means you can save £1 in your SIPP for 80p. You can also take up to 25% of your SIPP as a tax-free lump sum when you retire. This is knows as a pension commencement lump sum. However, you will have to pay tax on any income you draw down from your SIPP after this.
The main advantage of an ISA is that you do not have to pay tax on any withdrawals you make but will not receive any tax relief on your contributions.
Whether you have a stocks and shares ISA or a SIPP, the return will depend largely on the success of your investment choices. But there are other factors that will affect your return. One of these is the tax relief which you will receive on SIPP contributions up to your annual limit of £40,000 or 100% of your earnings, which effectively gives you an instant return of 20%.
The other factor is charges. Charges are generally higher for SIPPs than ISAs, as they are more complicated to administer. However, the tax relief is likely to more than make up for the higher charges. ii charges a flat fee for SIPPs and ISAs, which stays the same even as your pension pot grows. This can lead to significant savings in the long term, as shown by independent research from The Lang Cat.
Contributions to SIPPs and ISAs
SIPPs and ISAs both have a limit to the amount you can contribute in a year. The annual allowance for ISAs is £20,000, which can be split between several different products, including cash ISAs, stocks and shares ISAs and lifetime ISA. The annual allowance for SIPPs depends on your circumstances:
- For most people, the allowance is 100% of your earnings, or £40,000 (including tax relief)
- Some high earners will be subject to a tapered allowance.
- If you do not have an income, your allowance will be £2,880.
- If you have already begun to access your pension, your allowance will be £4,000.
There is also a SIPP lifetime allowance of £1.055million. If you exceed this limit, you may be subject to a charge.
Accessing your money in a SIPP or ISA
SIPPs are designed to be a long-term investment, and you will not be able to access your pension pot before the age of 55 (57 from 2028). This is something you should be aware of before you decide to invest in a SIPP.
ISAs allow you to access your money instantly, except in the case of lifetime ISAs. If you are under 60 and withdraw money from a lifetime ISA, unless it is to buy a first home or you are terminally ill with less than 12 months to live, then you may be subject to a charge of 25%.
How to decide what assets to put in ISAs and SIPPs
Both ISAs and SIPPs give you access to a wide range of investment options, including stocks, trusts and ETFs. Your investment choices will be driven by factors including your age, risk appetite and financial goals. We offer a range of fund recommendations and ready-made portfolio suggestions, including Quick Start Funds and the ii Super 60. You can also view the most popular investments held by our ISA and SIPP customers, including a breakdown of investment types.
An award-winning SIPP
Transfer to us and benefit from an award-winning service at the low price of just £9.99 per month, plus £10 per month SIPP administration fee. In return, you'll enjoy access to our full range of services, news and insight, as well as £7.99 free credit each month to use against any trade. We are proud to have been named Best SIPP Provider at the 2019 ADVFN Awards.