SIPPs Vs Stocks and Shares ISAs: How to Choose the Right Tax-Free Vehicle for Your Pension Savings

There has never been more choice for pension savers thanks to a multitude of tax-free savings plans which are available to savers of all ages.

But between Lifetime ISAs, Stocks and Shares ISA and do-it-yourself Self-Invested Personal Pensions (SIPP), it can be hard to figure out which tax-free wrapper is best for you.

Read on as we make the case for SIPPs and ISAs.

Why you should invest in a SIPP

SIPPs were literally built for pension savings.

They were first introduced in 1989 (predating the ISA by a full ten years) as a way to help employees to take more control over their pension pots, and over the years they have been tweaked and expanded to suit the majority of savers.

Savers can use their SIPP to invest in a huge variety of stocks, shares, funds, gilts, bonds, and even hard assets such as in gold bullion.

Anything invested via a SIPP is protected from taxation, although you will be taxed once you start making withdrawals.

However, once you retire, your income tax liability is likely to be much lower than it was while you were working, so you would be taxed at 20 per cent, rather than 40 or 45 per cent.

The main benefit of a SIPP is that you are in charge of your own portfolio.

This means that you can decide just how much risk you are willing to take on, and change your allocations at any given moment.

For instance, younger investors are often more comfortable taking on higher risk investments in areas such as alternative lending, or hedge funds.

As you near your ideal retirement date, you may prefer to move your money into low-risk, income-producing investments such as government bonds.

It is worth noting, however, that there will be a small charge every time you switch your portfolio allocation, and overly-active SIPP investors could find that these charges erode any returns that are made.

The other big benefit of the SIPP is that you can withdraw 25 per cent as a one-off cash payment on the day that you retire, completely tax free. You can then use this money to treat yourself, to gift family members, or to re-invest – the choice is yours.

How much can you save via a SIPP?

As of 2017/18, you can invest up to 100 per cent of their annual salary, up to the value of £40,000 in a SIPP, completely tax free.

Anything beyond this will be subject to capital gains or income tax.

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Who can save via a SIPP?

Any UK taxpayer can invest in a SIPP.

However, once your money has been allocated, you can’t withdraw it until your 55th Early withdrawals are possible, but you will lose your tax-free benefits and there will usually be a stiff penalty fee to pay on top of this.

Who are SIPPs Best for?

SIPPs are for serious pension savers who won’t be tempted to dip into their savings early.

Why you should invest in an ISA

Unlike SIPPs, ISAs were not created to act as pension funds, but they have evolved to become a great alternative to traditional pension pots.

As of April 2017, UK tax-payers can invest up to £20,000 in an ISA, and this limit is reset every year. Savvy savers can take advantage of this allowance to top up their existing pension fund, or even start a new one.

Like SIPPs, ISA investments can be spread across a huge range of asset classes, from instant access cash accounts (Cash ISAs) to alternative lending (Innovative Finance ISAs), to stock market picks (Stocks and Shares ISA).

Last year, the Lifetime ISA (LISA) was introduced as a way to help younger people save for their pensions. Up to £4,000 can be invested in a LISA in each tax year, and the government will pay a 25 per cent bonus on top of any interest you are already receiving.

But there is a catch – savers are strongly discouraged from making withdrawals before the age of 60, and there are heavy penalties for any money which is taken out ahead of time.

How much can you save via an ISA?

As of 2017/18, savers can put away up to £20,000 per year in ISA savings.

This money can be split across stocks and shares, cash ISA accounts, and innovative finance options such as peer to peer lending.

However, if you are investing via the LISA, there is a maximum annual limit of £4,000, and you can only invest until you are 50 years of age.

Who can save via an ISA?

With the exception of the LISA, anyone can save within an ISA at any age, and with any amount of money. LISA investments are only available to anyone aged 18-50.

Who is an ISA Best for?

An ISA would be best for younger savers, or recent retirees who want to make their money work harder.

But you could just utilise both products to give additional flexibility to your finances.

ISA v PENSION - Compare the Numbers

This table looks at wow much can you make as a basic rate (20%) taxpayer.

*assumed growth of 7 per cent per year
**over 20 years
 ISA (0.5 per cent charge)*Pension (one per cent charge)*Pension (1.5 per cent charge)*
Amount invested per month£200£200£200
Tax reliefN/A£50£50
Total invested£200£250£250
Total capital saved after 40 years£96,000£120,000£120,000
Total earned in compound interest after 40 years£401,103.29£540,031.20£540,031.20
Total saved, inclusive of interest£497,103.29£660,031.20£660,031.20
Effect of charges£60,888.57£180,790.33£238,105.09
Fund remaining£436,214.72£479,240.87£421,926.11
Tax-free lump sum (25 per cent of remaining fund)N/A£119,810.22£105,481.53
Potential income before tax**£21,810.74£23,962.04£21,096.31
Minus basic rate taxN/A£2,492.41£1,919.26
After tax income£21,810.74£21,469.63£19,177.05

Kathryn Gaw

Kathryn Gaw is a financial journalist based in Belfast, Northern Ireland. She has been writing about personal finance and investment trends for more than a decade, and her work has been featured in the Financial Times, City A.M., the Press Association, and The Irish Independent, among many other publications.