Deciding Between A SIPP Or ISA: Which Is Right For You?

SIPPs and ISAs

Whether you’re saving for your retirement or you would simply like to make your savings grow in a tax-efficient way, you might be considering a Self-Invested Pension Plan (SIPP) or an Individual Savings Account (ISA). 

In addition to tax benefits, SIPPs and ISAs provide a greater choice of investment options in comparison to mainstream savings accounts.

But what are SIPPs and ISAs, and what’s the best way to compare them to make a decision?

SIPPs and ISAs are treated differently when it comes to tax, offer different investment options and potential returns, and have differing rules for paying in and withdrawing funds. 

It’s essential to understand the full facts about SIPPs and ISAs alongside your personal circumstances, so you can ensure that any financial decisions you make are right for you.

What are SIPPs and ISAs?

A SIPP is a pension plan, but unlike other types of pension, you have control over exactly what you invest your savings in.

A pension isn’t a savings account, so you can’t start to access the money until you are 55. 

The idea of a SIPP, like any pension, is to provide increased value on your investments overall by the time you come to retire. But any growth is based on your selection of investments and how they perform. 

There are different types of ISA, including a cash ISA and a stocks and shares ISA.

A cash ISA is similar to a savings account — there is a set interest rate (money you earn), and you don’t get to choose how your money is invested — the bank does this for you. 

You can access your money at any time with a cash ISA, but there are rules around how much you can pay into any ISA due to tax-free allowances. 

A stocks and shares ISA lets you select where you would like to invest your money.

With a stocks and shares ISA, you can choose investment types such as individual shares, investment funds, investment trusts, and bonds. 

You can withdraw money from a stocks and shares ISA, but you would have to sell your stocks and shares first, so there’s a slight delay in comparison to withdrawing cash from a cash point.

Compare tax relief for SIPPs and ISAs

In the UK, you are required to pay income tax on any money generated from investments and capital gains on increases in assets’ value. 

SIPPs and ISAs both provide a method of saving while benefiting from tax-free allowances and options, but they do have rules and regulations.

As a SIPP is a pension product, you’ll receive an additional 20 per cent or 40 per cent (higher-rate taxpayer) top-up from the Government when you deposit funds (or you can claim this on your tax return). 

For this reason, when comparing tax benefits, SIPPS come out on top, as ISAs aren’t treated the same under UK rules. 

Does withdrawing money from a SIPP or ISA have tax implications? 

If you take money out of an ISA, you won’t have to pay tax (it is assumed that tax has been paid before the deposit was made via PAYE or your tax return).

Whereas a SIPP only offers access to 25% of the value tax free, any further withdrawals are taxable (which is because the tax wasn’t paid when deposits were made — the Government topped up the tax). 

SIPPs are often chosen where income is high while in employment (higher-rate taxpayer) and then at a lower, basic rate on retirement.

Is a SIPP or an ISA a better investment?

Like with any savings account, interest rates within cash ISAs will go up and down, but as these accounts allow instant access to funds, they often offer a lower rate of interest. 

Longer-term options like stocks and shares ISAs can mean that your funds can go up and down depending on your investment choice, but are chosen as, over time, they can provide the potential to perform.

SIPPs also rely upon your investment choice and how they perform but are often chosen for the Government tax top-up as mentioned previously.

How your investments are managed over time directly correlates with the potential your stocks and shares ISA or SIPP has to perform. 

That’s why it’s advisable to take advice on your investment decision at the start and have an adviser managing your investment moving forward.

For example, Prosperity Wealth’s advisers currently have £1bn of funds under management,

Key Advantages Of A SIPP

  • Provides a tax-efficient way to grow your savings with a 20% (basic rate taxpayer) or 40% (higher-rate taxpayer) Government tax top-up and a 25% tax-free lump sum at 55.
  • Allows you to choose exactly what you would like to invest your money in.
  • Pay in up to 100% of your income (up to £40,000).

Key Advantages of An ISA (stocks and shares)

  • Provides a tax-efficient way to grow your savings with a tax-free allowance of £20,000 per financial year.
  • Allows you to choose exactly what you would like to invest your money in.
  • Access to funds at any age by selling stocks and shares.

Are there rules for SIPPs and ISAs?

Yes, there are rules around how much you can pay in and withdraw. 

The amount you can pay into an ISA is set by Government policy as it includes tax relief, which is £20,000 (2020/21 tax year). 

Some people get caught out by assuming the £20,000 rule is the amount in the ISA; the rules are concerned with money paid in, not your balance — so if you paid in £20,000 and withdrew £5,000 (£15,000 balance) — you wouldn’t benefit from the tax allowance if you paid more in during the same financial year.

Whereas you can pay 100% of your income into a SIPP (up to £40,000), though there are some exceptions in the small print, which a pension adviser can discuss with you. 

You can pay £2,880 into a SIPP even if you’re not a taxpayer and still benefit from a tax top-up.

SIPP versus ISA summary

If you’re trying to decide whether to use a SIPP or an ISA to grow your savings, it might be worth talking to a financial adviser at Prosperity Wealth or considering your circumstances. 

It’s easy to look at the facts, the differences, and decide on face value that it’s the correct direction, but your circumstances now and in the future should be a consideration too. 

On face value, you can see that an ISA offers access to money when you need it and you have to wait until you’re 55 to release money from a SIPP.

A SIPP or stocks and shares ISA gives you more control over what you invest in, but you can’t guarantee how those investments will perform. A cash ISA is likely to provide a potentially lower return that is guaranteed (although the interest rate can change) and is more like a savings account. 

There are many advantages to both a SIPP and an ISA in terms of tax, but in terms of tax relief and investment potential, a SIPP might look more appealing. 

However, a SIPP might not be suitable if you aren’t comfortable with risk and if you haven’t got any other savings to use if your boiler breaks down, you might need instant access to funds. 

Perhaps you have a high income now and would benefit from a SIPP for tax relief long-term; you might not be comfortable with long-term investments but actively want to control what you invest your money in. 

Your decision is closely linked to you as a person, so it’s essential to look at the facts, your current circumstances, and your plans for the future when considering any financial matter.

Based in the West Midlands, Prosperity Wealth is FCA regulated and has been providing pension advice on transfer values for many years, with thousands of happy clients and £1bn in funds under management.

At Prosperity Wealth, we believe that an adviser’s value is in the detail and the openness we provide, which is crucial for managing your wealth.

Prosperity Wealth has a straightforward process to help you with your retirement planning. From an initial discussion and fact-find to presenting you with a recommendation, you can be confident that you’ll have all of the information you need. 


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