SIPP vs ISA: What are the differences?

What is a SIPP?

A Self-invested personal pension (or SIPP) is a type of pension that gives you control over how your retirement pot is invested. The government adds tax relief to your contributions and your investments can grow tax-free inside the pension.

Find out more about SIPPs

What is an ISA?

An individual savings account (or ISA) helps you save or invest money without paying UK tax on the interest, dividends or any investment gains.

There are five different types of ISA:

• Stocks and shares ISA
• Lifetime ISA
• Innovative Finance ISA
• Cash ISA
• Junior ISA

At AJ Bell, we offer Stocks and shares ISAs, Lifetime ISAs and Junior ISAs.

Learn more about ISAs

Read about different ISA types

What are the main differences between a SIPP and an ISA?

Is a SIPP better than an ISA?

Whether you choose an AJ Bell ISA or AJ Bell SIPP, you can build a pot of money in a tax-efficient way. Both let you invest in a wide range of funds, shares and bonds, and both keep your investment returns tax-free. 

When weighing it up, the two biggest differences are: 

•  How and when you can access your money

  You can access money in an ISA tax-free at any time. But you can’t withdraw money from a SIPP until you’re age 55 (57 from 6 April 2028) – and only 25% of the pot is tax-free.

•  The tax relief bonus of a SIPP

  Though you can access an ISA at any time, you won’t receive any bonuses on the money you save. As a SIPP is a pension, you’ll receive tax relief – a significant top-up from the government on what you pay in. 

If you’re under 40, it may also be worth thinking about a Lifetime ISA, which sits somewhere between an ISA and SIPP. You’ll receive a bonus on the money you pay into a Lifetime ISA, but there’s a government penalty if you take the money out before age 60, unless you’re using it to buy your first home.

Read more about which is better for retirement, a Lifetime ISA or a pension.

Can I have both an ISA and SIPP?

Yes, you can. There’s no need to decide between an AJ Bell ISA vs SIPP – you can open both accounts and pay into them both if you’re able. Just make sure you’re aware of the annual limits and allowances that apply to each account.

Can you move money from a SIPP to an ISA?

No, you can’t generally move money between SIPPs and ISAs. The only way you can take money out of a SIPP is when you’ve reached the minimum age of retirement.

Everything you need to know about ISAs

Because you can take money out of most types of ISA when you like, tax-free, they’re really useful for medium-term savings goals like a holiday or buying a house. Remember that Lifetime ISAs have additional withdrawal restrictions if you want to avoid a penalty.

You can save up to £20,000 into an ISA each tax year. This is an overall limit, which you can split between all ISA types – Stocks and shares, Cash, Lifetime, and Innovative Finance.

Three flavours of ISA

It can help to split all ISA types into three broad categories. Let’s take them one by one:

•  ISAs that help you invest

A Stocks and shares ISA is a popular way of holding shares, funds and bonds, among other assets. You don’t pay any tax on capital gains, and dividend or coupon income from your investments is paid tax-free into your account.

There are also Junior ISAs that parents or guardians can open to help them invest for their children. 

•  ISAs that help you save in cash

A Cash ISA is like a normal savings account, except the interest is tax-free. Unlike a Stocks and shares ISA, your cash won’t be affected by investment fluctuations, but inflation can affect your buying power over the long term. This risk is worth bearing in mind if you’re considering a SIPP or ISA for retirement.

•  ISAs that help you save for your first home or retirement

A Lifetime ISA can be opened by UK residents aged 18–39. It’s designed to help you buy your first home or save for retirement.

You can choose a cash Lifetime ISA or an investment Lifetime ISA, which can hold shares, funds, bonds and exchange traded funds.

Each year, you can pay in up to £4,000 and receive a 25% Lifetime ISA bonus from the government. This bonus is paid upfront.

Once it’s open, you can keep paying into your AJ Bell Lifetime ISA until age 50. You can withdraw your money without penalty when you turn 60, or if you’re using it towards a first home or are terminally ill. Otherwise, you’ll have to pay a withdrawal charge of 25% of the amount you withdraw, which means you could get back less than you put in.

Everything you need to know about SIPPs

With a SIPP, you’re in control of how much you pay into your pension and what you choose to invest in.

Money you personally pay into a SIPP will receive 20% tax relief. That means if you pay in £8,000, the government automatically adds £2,000 – which you can also invest.

If you pay income tax at 40% or 45% or at higher rates of Scottish income tax, you can claim more tax relief from HMRC directly. Tax relief is generous, but there are limits that apply.

The amount you can pay into SIPPs personally, and get tax relief on, is limited to your UK earnings. And you’ll only receive tax relief up to age 75.

There’s also the pension annual allowance to think about. The standard allowance is £60,000 and covers all sources of contribution, across all your pensions in a tax year. The pension annual allowance is reduced for those with high incomes (usually above £260,000) down to a minimum of £10,000.

SIPP or ISA for retirement?

If you’re thinking of using a SIPP or ISA for retirement, it’s important to consider how and when you can access your funds. You can’t access money in a SIPP until you’re 55 (rising to age 57 from 6 April 2028), which removes the temptation of dipping into your retirement fund in your younger years. A Lifetime ISA imposes a 25% government penalty on withdrawals before age 60, unless you’re using the money to buy a first house, or have a terminal illness.

When you’re old enough to access your SIPP, you can take up to 25% of its value as a tax-free lump sum. Anything you take on top of this is taxed at your current income tax rate.

There's no longer a limit on the total value of pension savings you can build up. However, there's a cap on the value of tax-free cash lump sums you can take across pensions, set at £268,275.

SIPP vs ISA FAQs