SIPPs and ISAs are both tax-efficient saving/investing accounts that can help you build wealth over the long run. However, there are some major differences between the two types of accounts.
SIPPs vs ISAs – Your Expert Guide
Wondering which type of account is best? You’ve come to the right place. Below, we compare SIPPs and ISAs to help you determine which type of account is most suitable for you.
|SIPP||Stocks & Shares ISA||Cash ISA||Lifetime ISA|
|Tax relief on contributions||Yes✔️||No❌||No❌||No❌|
|25% government bonus on contributions||No❌||No❌||No❌||Yes✔️|
|Access||From age 55 (57 from 2028)||Anytime||Anytime||From age 60 or when first house is purchased|
|Subject to IHT||No❌||Yes✔️||Yes✔️||Yes✔️|
What Is A SIPP?
A SIPP (Self-Invested Personal Pension) is a government-approved, tax-efficient retirement account that allows you to control your pension savings. With this type of account, you can choose exactly how your retirement savings are invested.
SIPPs are similar to personal pensions (pensions that you arrange yourself). However, they usually offer more investment options. Most SIPPs offer access to a wide range of investments including UK shares, international shares, funds, investment trusts, exchange-traded funds (ETFs), bonds, and more.
SIPPs are offered by a range of providers. However, not all SIPP products are created equal. For example, some have more investment choices than others.
- Read reviews and compare the best SIPP providers here
What Is An ISA?
An ISA (Individual Savings Account) is a type of account that lets you save or invest tax-efficiently. Within these accounts, all capital gains, dividend income, and interest are tax-free.
There are several different types of ISAs including:
- Stocks and Shares ISAs – these offer access to investments such as stocks, funds, and ETFs.
- Cash ISAs – these allow you to earn tax-free interest on your cash savings.
- Lifetime ISAs – these are designed to help people save for retirement and/or buy their first house. You can only open one if you are aged between 18 and 40.
- Innovative Finance ISAs – these offer access to peer-to-peer (P2P) loans.
Like SIPPs, ISAs are offered by a range of providers. Read reviews and compare the best ISA providers here
SIPPs vs ISAs: Benefits Compared
The main benefit of saving and investing within a SIPP, aside from the fact that investment gains and income are tax-free, is that contributions come with tax relief. This is essentially a reward from the government for putting money away for retirement.
The amount of tax relief you receive depends on which Income Tax band you’re in. However, for basic-rate taxpayers, it’s 20% (higher-rate and additional-rate taxpayers can claim extra tax relief through their tax returns). This means that if you were to put £800 into your SIPP, the government would add in another £200, taking your total contribution to £1,000. The annual allowance for tax relief purposes is currently £60,000 per year or 100% of your salary, whichever is lower.
One other benefit of SIPPs that’s worth highlighting is that they are not subject to Inheritance Tax (IHT). So, they can be very effective from an estate planning perspective.
As for ISAs, the main advantage of these accounts (looking beyond the fact that capital gains, dividend income, and interest are tax-free) is that money can be withdrawn from them at any time (this is not the case with Lifetime ISAs). So, they give you a lot more flexibility than SIPPs, which require you to lock your money away until the age of 55 (57 from 2028).
It’s worth noting that with ISAs, the annual allowance is a generous £20,000 (£4,000 for Lifetime ISAs). This means that a couple could potentially save or invest £40,000 per year tax-free within two ISA accounts and have the ability to access the money at any time.
SIPPs vs ISAs: Drawbacks Compared
- SIPPs: The main drawback of SIPPs is that your money is locked away until the age of 55 (57 from 2028). Another drawback is that when you reach the age of 55, you can only withdraw 25% of your money tax-free (the rest is subject to Income Tax).
- ISAs: The main drawback is that contributions don’t come with tax relief (Lifetime ISA contributions come with a 25% bonus). An additional drawback is that these accounts are subject to IHT.
When it comes to choosing between a SIPP and a Stocks and Shares ISA, the best type of account for you will depend on your goals and circumstances. Here are some examples of what type of account should best suit certain circumstances.
If you are saving and investing for retirement, a SIPP may be the best option for you. A SIPP will provide you with a broad range of investment options for your retirement savings. And contributions into your account will come with tax relief, helping you to grow your retirement savings faster.
If you are saving or investing for a shorter-term goal (e.g. a house deposit, school or university fees, a wedding, etc.), an ISA might be more appropriate for you. With an ISA, you can withdraw your money at any time (this is not the case with Lifetime ISAs).
SIPPs vs Lifetime ISAs
Both SIPPs and Lifetime ISAs can be effective retirement saving accounts.
With a SIPP, investment gains and income are tax-free, and contributions come with tax relief.
With a Lifetime ISA, investment gains and income are tax-free, and contributions come with a 25% bonus from the government (up to the annual allowance of £4,000 and only before the age of 50).
Where SIPPs have an edge over Lifetime ISAs is the annual allowance. Currently, the annual allowance for tax relief purposes is £60,000 or 100% of your salary (whichever is lower) versus the annual allowance of £4,000 for the Lifetime ISA.
So, while the maximum bonus you can get from a Lifetime ISA is £1,000, you could potentially pocket way more than this in tax relief from a SIPP. For example, if you were to contribute £20,000 into a SIPP as a basic-rate taxpayer, you would receive tax relief of £5,000.
The other advantage of SIPPs is that money can be accessed at 55 (57 from 2028) versus 60 (or when you buy your first property) for a Lifetime ISA.
One major benefit of Lifetime ISAs, however, is that at age 60, you can withdraw all your money tax-free. By contrast, with a SIPP, you can only withdraw 25% tax-free. The rest of your money is subject to Income Tax.
Junior SIPPs vs Junior ISAs
A Junior SIPP is a retirement account designed for children. Junior SIPPs are similar to regular SIPPs, however, they can only be opened for those under the age of 18 and they must be opened by a parent or legal guardian on behalf of the child (the parent or legal guardian is responsible for managing the account until the child turns 18). As with a regular SIPP, money in a Junior SIPP cannot be accessed until the account owner turns 55 (57 from 2028 onwards).
Junior SIPPs have an annual allowance of £2,880. However, contributions come with 20% tax relief. This means that if you were to contribute the full annual allowance of £2,880, the government would contribute another £720 for you, taking the total contribution to £3,600.
A Junior ISA is an ISA account designed for children. You can open a Junior ISA (either a Junior Cash ISA or a Junior Stocks and Shares ISA) for your child if they are under 18 (the account must be opened by a parent or legal guardian). The annual allowance is £9,000.
With a Junior ISA, any money in the account belongs to the child. However, they cannot access the money until they turn 18, apart from in exceptional circumstances. When they turn 18, the account is automatically rolled over into an adult ISA.
Now, both Junior SIPPs and Junior ISAs can be a great way of saving/investing on behalf of your children. However, there are a few issues to be aware of. With a Junior SIPP, the money cannot be accessed until the child turns 55 (58 from 2027). With a Junior ISA, the child can access the money at 18.
SIPPs vs ISAs – Your FAQs Answered
If you are saving and investing for retirement, a SIPP could be the better option. If you are saving or investing for a shorter-term goal, however, an ISA might be the best bet.
It’s worth noting that you can have both a SIPP and an ISA. Having both can help you take advantage of the benefits of each type of account.
The answer to this question depends on your goals and circumstances.
If you are looking to boost your retirement savings, it could be worth moving money from an ISA to a SIPP. By doing this, you could pick up tax relief.
Be aware of SIPP restrictions, however. With a SIPP, you cannot access your money until the age of 55 (57 from 2028).
Both SIPPs and ISAs are tax-efficient. However, SIPPs are generally considered to be more tax-efficient than ISAs because contributions into a SIPP come with tax relief.