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SIPP VS ISA: Which One Should You Choose for Your Retirement?

The economic conditions brought about by COVID-19 have prompted many of us to consider our financial futures. The pandemic has posed severe challenges to businesses and investors alike, with financial problems near the top of the list for everyone. As always, one consideration long-term savers need to make is the choice between various retirement savings options. Under the current economic conditions, the choice between SIPP vs ISA has become more relevant and necessary than ever before.

What does SIPP stand for?Self-Invested Personal Pension
What does ISA stand for?Individual Savings Account
The most significant advantage of a SIPPTax efficiency
The most significant advantage of an ISAFlexibility
SIPP or ISA?It really depends on your end goal

In a nutshell, when comparing SIPP vs ISA, both are excellent options that help individuals build a pot of money for their retirement and protect their savings from heavy taxes. Both SIPPs and ISAs have several advantages, including tax-free returns and a breadth of portfolio options to invest in. However, they differ in many ways, like how accessible the fund is. Ultimately, a SIPP offers perks that an ISA doesn’t and vice versa. Also, a combination of the two can be an efficient way to manage both medium-term and long-term savings.

What is a SIPP?

A SIPP or a self-invested personal pension plan is a tax-efficient way to save money for retirement. It allows UK residents to take control of their investment decisions and choose what they want to do with their pension fund. A SIPP enables you to invest a part of your pre-tax income in asset types of your choice and make flexible investment decisions.

A SIPP is usually chosen by people for its flexibility and tax efficiency. Part of the pension contributions or savings made to a SIPP is tax-free. A UK resident who pays the basic 20% tax on their earnings can make contributions towards a SIPP and get an extra 20% in pension tax relief. However, the tax relief is capped at contributions of up to £60,000 per financial year. Any contributions made to the SIPP beyond the annual allowance are taxed.

Additionally, for high-income earners above £260,000 per year, the yearly allowance drops by £1 for every £2 of excess income and can drop down to as low as £10,000.

Benefits of a SIPP

The most significant advantage of a self-invested personal pension scheme, when compared to other pension plans, is its tax efficiency. The money saved for retirement through a SIPP is tax-free up to the limit of the annual allowance. Additionally, the first 25% of the lump sum withdrawal is also tax-free.

Another critical benefit of SIPPs is their flexibility and ability to manage risk through diversification. Holders get to decide between different avenues of investment and choose the asset types they want to invest in. When controlled by an experienced wealth manager, they can prove to be highly profitable accounts.

The SIPP benefits transfer to your nominated beneficiary as either a lump sum or an ongoing fund if you die. A noteworthy advantage of a SIPP is that death benefits are not subject to inheritance tax, and if you die before the age of 75, there is no tax liability.

Drawbacks of a SIPP

When comparing SIPP vs ISA, there are some significant drawbacks with a SIPP, which lie in the withdrawal process. Firstly, the savings in a SIPP are locked in for an extended period, and the entire withdrawal is not tax-free. The first 25% of the uncrystallised fund pension lump sums can be withdrawn tax-free, but the remaining 75% remains subject to income tax deduction at source. Therefore, if not managed efficiently, individuals may pay a lot of taxes, which would eat into their savings. Additionally, the tax savings on SIPP contributions are also capped with the annual allowance limit.

What is an ISA?

An ISA or an Individual Savings Account is another tax-efficient way of saving money for medium-term life goals. ISAs allow individuals to save in cash or invest in stocks and shares  (here is a comparison between the two solutions over a 10-year period), and the biggest advantage when comparing SIPP vs ISA is that when you withdraw the returns from an ISA, you do so without paying any tax on them. The government allows people to save up to £20,000 per year in ISAs of different types, including Cash ISA, Stocks and Shares ISA, Lifetime ISA, and Innovative Finance ISA.

While the other types of ISAs are more suitable for short-term and medium-term financial needs, Lifetime ISAs are best suited for buying a home or retirement. Individuals can save in cash or investments through their Lifetime ISA and add up to £4,000 per year until they’re 50. After that, the government tops up the saved amount with a 25% bonus – £1,000 a year. If you want to know more about ISAs, make sure you check our full guide.

Benefits of an ISA

The most significant advantage of an ISA when doing a SIPP vs ISA comparison is its flexibility. ISAs offer versatility both in terms of withdrawal and investment decisions. There is generally no lock-in period for ISAs, and savers have instant and full access to their money. Furthermore, you don’t lose the tax benefits for the remainder of your savings if you make a partial withdrawal. Depending on the type of ISA, the withdrawn money can also be returned to the account within the same tax year.

Additionally, all types of ISAs provide tax benefits. It’s a key consideration in the SIPP vs ISA debate. For example, money taken out from cash ISAs is not taxed, and there is no capital gains tax on profits earned through shares and stocks ISAs. ISAs also offer the benefit of no tax on dividend income and no tax on interest earned on bonds. Thus, ISAs work as tax-efficient modes of saving in cash as well as investing in stocks and bonds.

The other benefits of an ISA include a wide range of investment options, the ability to transfer between providers without losing the accrued ISA status, no age restrictions, and the ability for it to be inherited by your spouse. It is critical to note that your ISA will remain open for a limited period if you die. During this time, no additional contributions can be made, but the account can continue to grow and retain its tax benefits. The funds are subject to inheritance tax, like any other asset, and are transferred to your beneficiary or administrator.

Drawbacks of an ISA

The biggest drawback with an ISA when looking at the SIPP vs ISA scenario, is that the contributions to an ISA are limited to the annual allowance of £20,000 per year, and the unused yearly allowance cannot be carried forward.

Other significant disadvantages occasionally include high charges and commissions and the inability to offset losses incurred in a stocks and shares ISA by capital gains on investments outside of ISA. In addition, investments made through ISAs are subject to volatility and market movements. Therefore, the total investments can fall in value. This is why it’s vital that, for an ISA to grow to the best of its ability over an extended period of time, it is best to entrust the management of the ISA to an experienced wealth manager.

Difference between a SIPP and an ISA

Both the SIPP and the ISA are tax-efficient ways to save for the future and for retirement. However, both products are very different and differ in some important ways. But the key difference between a SIPP vs ISA is their tax treatment, as SIPPs are tax-deductible on contributions but taxed on withdrawals, while ISAs are tax-free on both contributions and withdrawals. Several differences are stated below, and they should make it easy for you to decide which is more applicable to your personal situation:

  • Tax on withdrawals: The first 25% of the funds in a SIPP can be accessed as the tax-free pension commencement lump sum, but the withdrawal of remaining funds from the SIPP is subject to income tax. On the other hand, the funds from an ISA can be withdrawn at any time without any tax liability, except for the Lifetime ISA. Any money withdrawn from a Lifetime ISA before the age of 60 – unless it’s to be used to buy a first home or to pay for medical expenses for terminal illnesses – is subject to a penalty charge of 25%. An ISA vs SIPP choice can be based on the tax treatment on withdrawals.
  • Minimum holding period: There is no minimum holding period for funds in an ISA. They can be withdrawn at any time and at any age. However, another important consideration is the SIPP vs ISA argument is that the money saved in a SIPP is locked in until age 55, so you cannot use the pension pot before that age. Therefore, a SIPP is more of a long-term investment, whereas an ISA is more suitable for medium-term requirements like a house, a car, a wedding, or your children’s university fees. Investors should be certain of their investment time horizon before deciding whether to invest in a SIPP or ISA.
  • Annual allowance: There is no upper limit to the money you can put into a SIPP; however, only the amount capped at the annual allowance of £60,000 per year is eligible for tax benefits. It is possible to carry forward the annual allowance of the SIPP for up to three years, while the yearly allowance of an ISA (£20,000) lapses the same financial year and cannot be carried forward. Therefore, people with huge disposable incomes should keep in mind the annual allowances when comparing SIPP vs ISA.
  • Death benefits: If you die, the funds in your SIPP and your ISA are transferred to your nominated beneficiary. However, the death benefits of a SIPP are not subject to inheritance tax, and if the death of the holder occurs before the age of 75, there is no tax liability for the nominee. On the other hand, the death benefits of an ISA are liable to both inheritance tax and other taxes.
  • Investment returns: The returns on investments made through SIPPs or ISAs largely depend on the investment decisions and the choice of investment securities. However, SIPPs tend to generate a higher net return on investments due to the tax benefits of 20% on the contributions. In some cases, when contemplating SIPP vs ISA, it has to be remembered that the savings on tax benefits may be offset by higher administration charges on SIPPs as they are more complicated to handle.

ISA additional permitted subscriptions

When it comes to a SIPP vs ISA, upon your death, if your estate (which includes any ISAs you may have) is valued at £325,000 or less, it is under the Inheritance Tax (IHT) threshold and will not be subject to IHT. Any amount above the threshold will attract IHT, the rate of which, at the time of writing, is 40%. If, in your last will and testament, you bequeath your home to your children, the estate threshold increases to £500,000.

There is also an exception regarding IHT relating to inheriting ISAs for a surviving spouse or civil partner. They will receive a one-time Additional Permitted Subscription, or APS for short. The value of this APS will be equivalent to the value of the funds in the ISA.

The money is not paid directly to the surviving partner. Instead, their ISA allowance is increased by the said amount so that the funds can be transferred to the partner’s ISA. If your spouse or civil partner doesn’t already have an ISA, one will be opened.

If, for example, the value of the APS is £500,000, the partner’s ISA allowance for that year will be £520,000 (their own £20K allowance plus the £500K APS. It is strictly a one-off occurrence. So, when comparing the SIPP vs ISA formats, the APS plays a significant role.

Best of both worlds

While investors should be aware of the factors above when comparing SIPP vs ISA, the answer to the question of whether to choose a SIPP or an ISA depends on the risk tolerance of the investor in question, along with their investment horizon. SIPPs and ISAs offer tax benefits and flexibility, but they differ in terms of the minimum holding period, ease of withdrawal, and some tax implications. While a SIPP works great for long-term needs post-retirement, an ISA is an excellent alternative for medium-term financial goals.

To reap the benefits of both a SIPP and an ISA, why not simply open a SIPP and an ISA. It doesn’t have to be ISA vs SIPP. Instead, combining the two options offers the best of both worlds and helps in managing a variety of investment goals. Individuals with a huge disposable income might find it beneficial to invest in both ISA and SIPP and carefully weighing the pros and cons of ISA vs SIPP and their respective tax treatments can help determine the best allocation of funds.

The combined effect of a SIPP and an ISA works to maximise the returns on investments for investors. In addition, the collaboration of a SIPP and an ISA offers the flexibility to compartmentalise investments based on specific needs and requirements and make the most of your money.


Here are the answers to some questions that come up when debating SIPP vs ISA

SIPP vs ISA: Which to choose for long-term investment?

SIPP and ISA accounts are good options for long-term investing. A SIPP and an ISA are great for longer-term goals such as retirement. They also provide some flexibility if you need extra money before you retire.

SIPP vs ISA: Which to choose for retirement?

Both SIPPs and ISAs can help you save for retirement. Ultimately, the decision between a SIPP vs ISA may come down to an investor’s specific retirement goals and time horizon. If it’s definitely for retirement and life after age 55, then SIPP accounts are designed for you.

SIPP or ISA: Should I open both?

You can have both, but please talk to a financial adviser if you’re not sure whether a SIPP or ISA is right for you.

You can use each account to achieve different financial goals. For instance, a SIPP allows you to access your money from age 55. Also, you can withdraw 25% of your pension fund without paying any taxes. An ISA gives you access to your money at any time without paying tax on it. Therefore, it can be a great way to meet some medium-term goals.

Keep an eye out for changes in tax rules and keep track of your investments, as assets can appreciate or depreciate.

SIPP vs ISA: How to decide what assets to put in?

Both ISAs and SIPPs offer a wide range of investments, including stocks, shares, trusts, bonds, and ETFs. When deciding between SIPP vs ISA, it’s important to consider your age, financial situation, investment goals, time horizon, risk tolerance, and tax implications.

Moneyfarm provides a range of fund recommendations for different types of investors, and we also offer customised portfolios for investors who want to invest. You can also view the investment holdings of our ISA and SIPP offerings, including a breakdown of asset classes.

Photo by Paul Trienekens on Unsplash

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*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.