SIPPs vs. ISAs

Both ISAs and self-invested personal pensions, known as SIPPs, are attractive options for investors, chiefly because of the tax benefits and the flexibility. But which is the best option for you?

In this article we compare SIPPs and ISAs, discuss the pros and cons of each, and look at how a financial advisor can help you decide which is right for you.

How do SIPPs compare with ISAs?

While both SIPPs and ISAs can offer flexible and tax efficient ways to save for retirement or long term financial goals, there are a few key differences between them that will determine which suits your circumstances best.

Withdrawals

One of the main arguments in the ISA vs SIPP debate is that a SIPP is specifically a pension product, so you cannot make any withdrawals until you’re at least 55 years old – increasing to 57 in April 2028. You don’t need to actively retire to be able to take money out of your SIPP, you just need to have reached the minimum pension age. With an ISA you’re usually free to make withdrawals at any time.

Tax

Savings in an ISA or a SIPP are both protected from capital gains tax and income tax. Contributions to a SIPP also get tax relief – 20% at source and an additional 20% or 25% for higher rate and additional rate tax, claimed via self assessment. All withdrawals from an ISA are considered tax-free, which means there are no tax consequences as a direct result of your withdrawal. However, you can usually only access 25% of your SIPP pension tax-free, with the remainder subject to income tax at your marginal rate if you opt to take income via Flexi-Access Drawdown.

How many you can open

There is no limit on the number of SIPPs you can open and pay into, as long as you keep within your annual SIPP allowance of £40,000 or 100% of your annual income, whichever is smaller (assuming you do not have access to carry forward and not subject to tapering). SIPP contributions over this limit will not be eligible for tax relief and will be subject to an annual allowance charge.

ISAs by contrast come with a few more restrictions. There are four different types of ISA – cash ISAs, stocks and shares ISAs, innovative finance ISAs and Lifetime ISAs – and you cannot subscribe to more than one of each type of ISA in any financial year. You also have an annual cap of £20,000 on savings into your ISAs across the board.

It’s worth noting some differences with a Lifetime ISA or LISA, which is a specific type of ISA with very particular terms. You can invest up to £4,000 a year into a LISA, which counts towards your £20,000 annual ISA allowance, but a LISA has the added benefit of a 25% government bonus paid annually on anything you pay in, up to a maximum of £1,000 per year. This means that the maximum gross contribution you can make into a LISA is £5,000 (£4,000 contribution + £1,000 bonus from the government bonus).

Unlike an ISA, which you can use to save for any purpose and normally cash in at any point, a LISA is open only to people aged 18-39 and you can withdraw money without a penalty applied only once you reach 60 or when you buy your first home. Withdrawals made outside of these conditions, unless it’s following the diagnosis of a terminal illness that reduces life expectancy to less than 12 months, will be subject to a 25% charge, leaving you without the government bonus and with less than you initially invested.

Why would you choose one over the other?

The main reasons for choosing a SIPP over an ISA or vice versa are flexibility and discipline. If you know that you want to be able to access your savings for another purpose before you reach minimum pension age or just in case of an emergency, then an ISA gives you that flexibility.

If, however, you are happy for your savings to be locked away until 55 and are keen to benefit from the additional tax relief, then a SIPP could be a better option. Saving into a pension rather than an ISA also helps to keep your cash safe from temptation. If you’re the kind of person who has a tendency to dip into savings for treats or holidays, a SIPP can help you to impose a little more self-discipline.

How a financial advisor can help you make the right choice

Choosing between a SIPP and an ISA is, of course, a lot more nuanced than simply choosing flexibility over tax efficiencies – it’s a big decision, and not one to be entered into lightly. Once your money is in a SIPP it’s there until you’re 55, so you don’t want to rush into investing only to discover down the line that it was the wrong choice for you.

An independent financial advisor can help you think objectively about your savings goals, your motivation and attitude to risk, and advise you on the best way to save.

The pensions advisors we work with all offer a free pension review service, where they can look at any retirement savings you have so far, where you’d ideally like to get to, and the most effective route to get there. They can also compare different SIPP providers to look at which fee structure might be the most cost effective for you.

Can you have an ISA and a SIPP?

Yes you can. There’s nothing stopping you investing in both a SIPP and an ISA and for many people this makes a lot of sense as it allows you to pursue multiple financial goals.

Paying into a SIPP means you benefit from the additional tax relief, and can add a little more discipline to your retirement savings, whilst saving into an ISA alongside this allows you to keep some flexibility and build up a pot of tax-free capital.

Transferring from one to the other

There isn’t a way to directly transfer an ISA into a SIPP or vice versa. If you decide that savings you have in an ISA would work harder for you in a SIPP, you would need to cash out your ISA and then use the cash to make a contribution to your pension pot. This money would be eligible for tax relief as any other contribution, as long as it doesn’t take you over your annual SIPP allowance.

Transferring out of a SIPP and into an ISA isn’t usually possible. There are some rare instances where this may be viable but it would depend on your specific personal circumstances. If you’re considering moving your investments it makes sense to talk to an independent financial advisor first to make sure you’re making the right choice for your circumstances.