SIPP vs ISA: Differences & which to choose?

A SIPP (Self-invested Personal Pension) is a type of pension that offers a wide range of investment options and gives you full control over where your money is invested. You can build your own investment portfolio using funds, investment trusts, exchange-traded funds (ETFs), as well as UK and overseas shares. Alternatively, you can choose a ready-made solution, such as the ii Managed Portfolio, if you want a more hands-off approach.

You can usually contribute up to 100% of your earnings each year, capped at £60,000 (or £3,600 gross if you have no earnings). 

For every personal payment you make into your SIPP from your net income, your pension provider will automatically claim basic rate (20%) tax relief for you. So, if you contribute £80, this will be topped up to £100.  If you’re a higher rate (40%) or additional rate (45%) taxpayer, you can claim back the rest of your tax relief through your annual Self-Assessment.

Your investments can grow free from UK income and Capital Gains Tax. However, because SIPPs are designed for retirement, you can normally only access your money from age 55 (rising to 57 in 2028).

A Stocks and Shares ISA is a tax-free investment account, offering access to a wide range of investments.

This includes funds, investment trusts, ETFs, bonds and shares. It’s completely up to you where you invest your money. You can build your own portfolio or opt for a Managed ISA, with investments selected and managed by experts on your behalf.

Your investments will grow tax-free, and there will be no tax to pay when you take money out. It’s normally recommended you invest for at least five years. However, you can access money in a Stocks and Shares ISA whenever you wish.

Each year, you can invest up to £20,000 across your ISAs. You can put the full amount into a stocks and shares ISA or split it between different types of ISAs. 

Types of ISAs overview

Stocks & Shares ISA:  A Stocks and Shares ISA (Individual Savings Account) is a tax-free investment account that allows you to invest in shares, funds, ETFs, investment trusts, bonds and gilts, or ready-made investment portfolios.

Cash ISA: A Cash ISA is a savings account that allows you to earn tax-free interest on your savings.

Junior ISA: A Junior Stocks & Shares ISA (JISA) is a tax-efficient investment account that lets you invest for your child’s future. You can invest up to £9,000 each tax year, and the money grows free from income and Capital Gains Tax.

Lifetime ISA A Lifetime ISA (LISA) is a type of ISA designed to help you save for your first home or for retirement. You can contribute up to £4,000 each tax year, and the government adds a 25% bonus to your savings. You can usually withdraw money from a Lifetime ISA to buy your first home, or at age 60. You will have to pay a 25% charge if you withdraw for any other reason.

Innovative finance ISA: An Innovative Finance ISA (IFISA) is a type of ISA that lets you invest your annual allowance (up to £20,000) in peer-to-peer (P2P) lending. Your money is loaned to borrowers, usually businesses or individuals, and you earn interest as they repay.

To help you understand the differences between these two tax-efficient accounts, we've delved into each of the following areas in greater detail:

• What they’re designed for
• How much can you pay in
• The tax benefits of SIPPs and ISAs
• How withdrawals are taxed
• Accessing your investments
• Inheritance

SIPPs vs ISAs: what they’re designed for

SIPPs: SIPPs help you save for retirement in a tax-efficient way, and you usually can’t access your pension pot until you reach the minimum pension age, currently 55, rising to 57 from 2028 for most people.

However, you don’t need to be fully retired to start taking money from your SIPP. Once you reach the minimum age for accessing your pension, you can choose how and when to withdraw your pension benefits. Just make sure you manage your withdrawals in the most tax-efficient way possible.

ISAs: Stocks and shares ISAs are designed for medium to long-term goals (five to 10 years or more). This gives you the opportunity to benefit from compound growth over time and ride out short-term volatility in the markets.

How much can you pay in: Contribution limits for SIPPs and ISAs 

SIPPs: You can contribute up to 100% of your relevant UK earnings into pensions each year, subject to an overall annual limit of £60,000.

This limit includes both personal and employer contributions. If you earn less than £60,000, your personal contributions will be capped at 100% of your earnings, but employer contributions can be made on top of this as long as total contributions (personal plus employer) do not exceed the annual allowance.

Additionally, if you haven’t used your annual allowance from the previous three tax years, it may be possible to ‘carry forward’ any unused allowances into the current tax year. To qualify you must have been a member of a UK-registered pension scheme in those years, and your contributions cannot exceed your relevant UK earnings.

There are some instances where individuals may have a lower pension allowance:

High earners, with an adjusted income over £260,000 a year, will have their allowance gradually reduced through what’s known as the tapered annual allowance. The minimum it can be reduced to is £10,000.

If you have already made a taxable withdrawal from your pension, the maximum you can contribute to defined contribution pensions will be reduced to £10,000 per year. This is known as the Money Purchase Annual Allowance (MPAA).

Even if you have no income, you can pay in £2,880 of your own money, which is then boosted by 20% tax relief (£720), giving a total contribution of £3,600.

ISAs: The maximum you can pay into ISAs, by comparison, is £20,000 a year. This can be wholly invested in a stocks and shares ISA or spread across different types of ISAs.

For example, you might decide to pay £5,000 into a cash ISA to bolster your emergency savings and £15,000 into a stocks and shares ISA to save and invest for your future.

Everyone has the same ISA allowance – it’s not impacted by your earnings or the rate of tax you pay.

The tax benefits of SIPPs and ISAs

Both ISAs and SIPPs let your investments grow free from tax. You won’t need to pay tax on dividends or capital gains – and you don’t need to declare either on your tax return.

The key difference between SIPPs and ISAs is in the tax treatment of money going in and money coming out.

SIPPs offer generous tax relief benefits on contributions, and you can take up to 25% of your pension pot tax-free (usually capped at £268,275), while there’s no tax on ISA withdrawals.

SIPPs: The key benefit of a SIPP is that contributions receive tax relief at your marginal rate of income tax.

• Basic-rate taxpayers (20%) get relief automatically: for every £80 you pay in, the government adds £20, giving a total contribution of £100.
• Higher-rate taxpayers (40%) and additional-rate taxpayers (45%) can claim further relief through Self-Assessment, reducing the effective cost of a £100 contribution to as little as £60 or £55.

If you have a workplace pension, depending on the type, your full tax relief may already be applied by your employer. Check with your employer if you’re unsure.

SIPP contributions lower your adjusted net income — the figure HMRC uses for allowances and benefits. This can help you:

• Avoid the 60% tax trap by restoring your personal allowance if income is between £100,000 and £125,140
• Reduce the High Income Child Benefit Charge
• Help retain other income-linked allowances like free childcare hours

In short, contributions both grow your pension and cut your tax bill while preserving key benefits.

ISAs: ISA contributions do not receive tax relief. Investing £100 costs you £100, but all withdrawals are tax-free.

How withdrawals are taxed

SIPPs: There are several ways to access and withdraw from your pension. Options include:

• Tax-free lump sum - Usually, 25% of your pension can be taken tax-free, up to a maximum of £268,275. This is known as a ‘Pension Commencement Lump Sum’ or PCLS. If you have a protected allowance in place, you may be entitled to higher tax-free lump sums. The remaining 75% is taxed as income at your marginal rate, even if you don’t plan to take it until later.
• Income drawdown - Also known as ‘flexi-access drawdown’, lets you take a tax-free lump sum of up to 25%. The remaining funds are moved into drawdown, where you can decide how much to withdraw and when, whether as regular or one-off payments.
• UFPLS (Uncrystallised Funds Pension Lump Sums) - Lump sums can be taken directly from your pension, as and when needed. The first 25% of each lump sum is tax-free, and the rest is taxed as income.
• Annuity - You can use some or all of your pot to purchase an annuity, which converts your pot into a guaranteed regular income. If you wish, 25% of your pot can be taken as a tax-free lump sum before buying an annuity. After that, any income you receive is treated as taxable income and subject to income tax.

These options give you the flexibility to tailor withdrawals to your needs and manage your tax position more efficiently.

ISAs: Withdrawals from an ISA are completely tax-free and can be made at any time, with no minimum age or restrictions.

Important information: Tax treatment depends on your individual circumstances and may be subject to change in the future.

Accessing your investments

SIPPs: Usually the earliest you can access your SIPP is age 55 (57 from 2028).

ISAs: You can usually withdraw money from an ISA whenever you like, although the rules differ slightly depending on the ISA type. The main exception is fixed-rate Cash ISAs, where early withdrawals are allowed but usually come with an early access charge.

Lifetime ISAs (LISAs) are accessible if you’re buying your first home or once you reach age 60. Withdrawals for any other reason normally incur a 25% penalty charge, which means you lose the bonus and part of your own savings.

Inheritance

When you die, the money in your SIPP or ISA can be passed on to your chosen beneficiaries, but the inheritance rules and how they’re taxed are different.

SIPPs: The tax treatment of your pension depends on your age at death. If you die before age 75, your beneficiaries won’t have to pay tax on any withdrawals they make, unless the amount exceeds the Lifetime Savings Death Benefit Allowance (LSDBA). If you die age 75 or older, withdrawals will be taxed at their usual rate of income tax.

Pensions are currently exempt from inheritance tax (IHT). However, in the 2024 Autumn Budget, the government announced that from April 6 2027, unused pension funds and death benefits will become part of your estate, and may be subject to IHT. This change affects most pensions, however there are certain exemptions. Transfers to a spouse or civil partner will also remain tax-free once these changes take effect.

ISAs: When you die, the value of your ISA is included in your estate and may be subject to inheritance tax. If you’re married or in a civil partnership, your partner may be entitled to an additional ISA allowance. This is known as the ‘Additional Permitted Subscription (APS)’, which allows them to add the value of your ISA to their current year allowance. Essentially, they can inherit an amount equal to the value of your ISA, not the money itself.

Both SIPPs and stocks and shares ISAs can be used to save for retirement. However, when it comes to growing a retirement pot, not all tax wrappers are created equal.

The table below compares the growth of a £20,000 annual investment into an ISA and a SIPP (the maximum that can be invested in an ISA each year).

It shows that tax relief on pension contributions gives SIPPs the edge over ISAs.

*Based on 5% average return each year, after charges 
** Note that SIPPs receive basic rate tax relief automatically. Higher and additional rate taxpayers will need to claim the outstanding relief back through their tax return.

While tax relief boosts SIPP contributions, it’s important to note that beyond the 25% tax-free lump sum, any further withdrawals from your pension will be subject to income tax. Withdrawals from ISAs are entirely tax-free.

However, even though pension income is taxable, SIPPs are still likely to provide better value for retirement savers. Most retirees will pay a lower tax rate in retirement compared to their working years, and there are several ways to help reduce the tax on your income.

Another advantage of SIPPs is that you can contribute 100% of your earnings (up to £60,000) into pensions, while the ISA allowance is limited to just £20,000 a year. By paying into a SIPP as early as you can, you give yourself the best chance to build the nest egg you'll need to enjoy the retirement lifestyle you want.

• You’re focused on saving for retirement
• You don’t need access to your money until at least age 55 (57 from 2028)
• You want to benefit from government tax relief (free money) on contributions
• You’re a higher or additional-rate taxpayer and want to make the most of extra tax relief
• You’re able to get your employer to boost your contributions
• You want to reduce your taxable income to avoid losing benefits or triggering extra taxes, e.g. personal allowance taper or child benefit charge

• You’re saving for a medium-term goal, such as a house deposit or building wealth before retirement
• You don’t want your money locked away until you’re 55 (57 from 2028)
• You’ve already used your pension allowances and need another tax-efficient home for your savings
• You have a workplace or personal pension but want an extra, flexible option to supplement your retirement income

Which product is right for you will depend on your investment goals: 

Planning for retirement? SIPPs are usually the most tax-efficient way to build retirement savings, thanks to tax relief.

Investing for the medium term? If you’re investing for a medium-term goal and don’t want to tie up your money until age 55 (57 from 2028), an ISA will be the better choice as it offers greater flexibility and tax-free withdrawals at any time.

For many people, the best approach isn’t either/or but a mix of both — using a SIPP to build retirement wealth and an ISA for accessible, tax-free savings along the way.

Absolutely. For many savers, having a SIPP and an ISA is a great way to balance tax efficiency and flexibility. A SIPP can help you grow your long-term retirement savings, while an ISA can shelter investments you might need in the meantime.

When you finish work, any remaining ISA funds can provide a source of tax-free income and help you plan your retirement finances more tax efficiently.