SIPP vs ISA

Stocks and shares ISAs and Self-invested personal pensions (SIPPs) are tax-efficient accounts (or ‘wrappers’) for holding your investments. In this article, we’ll look at how each account works so that you can decide which could be best for you and your goals.

The main difference between a SIPP vs ISA is that money paid into a SIPP benefits from tax relief, but money paid into a Stocks and shares ISA doesn’t.

Is a SIPP better than an ISA?

Whether you choose an ISA or SIPP, you can build up a pot of money in a tax-efficient way. Both let you invest in a wide range of funds, shares and bonds, and both let you earn 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.

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.

What are the main differences between a SIPP and ISA?

Can I have both an ISA and SIPP?

Yes, you can. There’s no need to decide between an 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.

Anything else I 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 the types of ISA – 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 save 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 what you can buy 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% bonus from the Government. Unlike Help to Buy ISAs (a type of Cash ISA no longer available to new savers), the bonus is paid upfront.

Once it’s open, you can keep paying into your 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.

Anything else I 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%, you can claim more tax relief from HMRC directly, usually via self-assessment. Tax relief is generous, but there are limits that apply.

The amount you can pay into SIPPs personally and get tax relief 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, 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. Similarly, a Lifetime ISA imposes a 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 maximum tax free cash lump sum you can take, now set at £268,275.