SIPP vs ISA
Both a Self-Invested Personal Pension and an Individual Savings Account let you shelter your money from tax. But choosing the right account will depend on your future goals.
Last Updated: 5 March 2024
Saving and investing tax-efficiently can help you to make the most of your money, but you must be happy with the risk of investing. Before deciding whether a SIPP or an ISA is best for your needs, it’s important to understand the ins and outs first.
We hope you find this article helpful, but it isn’t personal advice. Pension, ISA and tax rules can change, and any benefits will depend on your circumstances. If you invest there’s the potential for gains, but it’s also possible to get back less than you put in. If you’re not sure what’s right for you, seek advice.
SIPP (Self-Invested Personal Pension)
Self-Invested Personal Pensions offer the same great tax benefits as other pensions, but with more investment choice. This can lead to more opportunities and the potential for greater returns. For anything you pay in, the government also adds a 20% boost in tax relief - even if you don’t pay tax. If you pay higher or additional rate tax, you can claim up to an extra 20% to 25% through your tax return (up to 27% if you’re a Scottish taxpayer).
Investments can grow free from UK income and capital gains tax. Each tax year you can usually shelter up to £60,000 across all your pensions (this includes personal and employer contributions, plus tax relief). To receive tax relief on your personal contributions you can’t pay in more than you earn. If you’re a non-earner or you earn less than £3,600, you can pay in up to £3,600 (including tax relief).
Money in a pension is meant for your retirement, so you can’t usually take money out again until you reach 55 (rising to 57 from 2028). At this point you can usually take up to 25% as tax-free cash (up to a maximum of £268,275), and any other withdrawals will be taxed as income.
Anyone can open a SIPP, and it can be a great way to save and invest for retirement, while minimising the tax you pay. For example, if you’ve already made the most of any employer contributions to your workplace pension, you might decide to open a SIPP alongside it. This means you can shelter more money from tax and invest freely, whilst still benefiting from maximum employer contributions into your workplace pension.
If you’re saving for a shorter-term goal, like your first home, you might want to consider a more flexible tax-efficient account alongside your workplace pension.
Stocks and Shares ISA
A Stocks and Shares ISA is another tax-efficient way to invest and potentially grow your money.
There’s no UK tax to pay on capital gains or income. You can pay in up to £20,000 in total across all your ISAs each tax year. This type of investment account is more flexible. It’s a great option for those looking to save and invest for the future tax-efficiently, while being able to make withdrawals, tax free, whenever you like. But remember, it’s usually best to invest for the long term (5 years or more).
Please be aware though, if you take money out of a non-flexible ISA it will lose its ISA status, and putting it back in will count as a new payment towards your annual limit of £20,000.
More on the HL Stocks and Shares ISA
Lifetime ISA (LISA)
A Lifetime ISA is designed for people looking to save or invest towards their first home or later life. Depending on the provider, you can choose to hold cash or invest in the stock market. But remember investments should be held for the long term, which could influence your decision here.
Like a Stocks and Shares ISA, there’s no UK tax to pay on capital gains or income. You can pay in up to £4,000 each tax year, which counts towards your overall £20,000 ISA limit.
One main difference to a Stocks and Shares ISA is that you’ll also get a 25% bonus added by the government on top of anything you pay in each tax year (up to £4,000). This means you could receive a £1,000 bonus each year.
There is a catch. You can only open a LISA if you’re 18-39 and add money to it until your 50th birthday. And if you take money out before age 60 (for anything other than buying your first home worth up to £450,000), there’s usually a government withdrawal charge. This is currently 25%, so you could get back less than you put in, regardless of how well your investments do.
A LISA can help you to meet your retirement goals, especially if you’re self-employed or a basic-rate taxpayer. As with a SIPP or ISA though, you should make sure you’re getting the most out of any employer contributions to a workplace pension first. And unlike money in a pension, money in a LISA or ISA could affect your entitlement to means-tested state benefits.
Cash ISA
If you’re not looking to invest, you could consider a Cash ISA. It works like a savings account with providers offering a rate of interest to save your cash with them. These providers can offer fixed or variable rates, as well as different levels of access to your savings. Usually, the longer you commit to saving for, the higher the rate on offer and the more restricted the access.
As a saver, perhaps the biggest difference between ISAs and savings accounts is all interest earned in ISAs is free from UK income tax.
You can pay in up to £20,000 each tax year. This is known as the ISA allowance, and is the maximum amount you can pay in across all your ISAs each tax year.
The best of each account
Both SIPPs and ISAs (including LISAs) have advantages, and lots of people take the benefits of each account. We don’t think it’s a case of choosing one over the other.
You might want to use a SIPP to invest for longer-term goals like your retirement, and an ISA for your medium-term goals. Whereas a LISA can be used for both, for example investing for later life or saving for your first home.
It’s important to think about your own objectives and attitude to risk when deciding what’s right for you. The benefits of each account will depend on your circumstances.
