SIPPs or ISAs – which one is best for your retirement savings?

ISAs (Individual Savings Accounts) and SIPPs (self-invested personal pensions) both offer generous tax benefits to help you make the most of the money you save.

While the tax relief they provide is given at different times, there are several other differences that you’ll need to consider when deciding which tax wrapper is right for you.

Choosing the right savings vehicle for you will depend on your future goals

Of course, as long as you are over 18, depending on your savings goals, your circumstances, and how committed you are to saving for your future, you could have both.

If you’re an employee and thinking about taking out a SIPP, you may first want to consider whether you might be better off increasing contributions to your workplace pension scheme. A financial planner can help you understand whether contributing to a SIPP it the right option for you.

You may find that your employer will match your increased contribution. In effect, this may give you “free money” that you may decide to take advantage of instead of investing elsewhere.

Once you’ve settled on this decision, read on to learn more about the other criteria you should consider when weighing up whether a SIPP or ISA is best for you.

Using a SIPP for your retirement savings

Saving for your retirement through a SIPP offers tax relief advantages. You can also be selective about where your money is invested.

The freedom to choose your own investments gives you control over where and how you invest. This means you can tailor your SIPP savings to align with your financial goals and values.

You can hold a variety of assets in a SIPP. Along with cash, some of the most popular assets you can hold include investment funds, shares, and commercial property. Additionally, you can choose to hold funds in currencies other than pound sterling, including euros, US dollars and Australian dollars.

You can also make flexible contributions to suit your circumstances. This can be helpful if you’re self-employed, particularly if your income varies throughout the year.

In terms of tax benefits, you’ll get the same relief as you would with other pensions. For any contribution you make, the government will add a 20% boost in tax relief. This tax relief is added automatically, even if you don’t pay tax.

Usually, you can save up to £40,000 and you’ll receive tax relief on contributions up to this sum, but you can’t pay in more than you earn. If you happen to be a non-earner or earn below £3,600, you can contribute up to £2,880 and you’ll get tax relief on top, even if you don’t pay Income Tax.

As with other pension arrangements, if you’re a higher- or additional-rate taxpayer, you can claim an extra 20% to 25% through your tax return.

The money you save in a pension will also grow free from UK Income Tax and Capital Gains Tax (CGT).

When you save into a SIPP, as with any pension, your fund is intended for your retirement, so you shouldn’t expect to be able to take your money out again until you reach age 55 (this age limit is due to rise to 57 from 2028).

Once you reach retirement age and want to access your savings, you can typically take up to 25% of the fund in tax-free cash. All other payments from your SIPP will be subject to Income Tax.

Using a Stocks and Shares ISA may require more discipline

A Stocks and Shares ISA is another tax-efficient way to save for your retirement. As with a SIPP, you have the freedom to choose the investments that make up your ISA, allowing you to match your investments with your timescale, goals and appetite for risk.

In many ways, saving into an ISA can be less complicated since the tax benefits aren’t tied up with having to claim on your tax return. However, you’ll also miss out on the automatic 20% tax relief that the government adds to your contributions.

When you invest into an ISA your money will grow free from UK Income Tax and CGT. Plus, unlike a pension, everything you take out of an ISA is tax-free.

Unlike with a SIPP, you are limited to investing only £20,000 (in the 2021/2022 tax year). You can save the full £20,000 in one type of account or split the allowance across other types of ISA. For example, you may have a cash ISA and want to funnel some money into that account too. If you’re paying into different types of ISA, it’s important that you take care not to exceed the £20,000 annual limit.

A Stocks and Shares ISA provides great flexibility. Unlike a pension, you can make tax-free withdrawals whenever you like. However, if you’re saving into an ISA for your retirement, it is wise to keep your money invested until you need to draw on it for income when you retire.

SIPP vs ISA – going head-to-head

If you know you may be tempted to withdraw money, if given the opportunity, you may be wiser to remove the temptation and open a SIPP instead.Your personal circumstances and attitude toward long-term saving will play a large part in whether an ISA or a SIPP is more appropriate for you.

Alternatively, if you are keen to find a tax-free income stream when you retire, then an ISA is perhaps a better way to save for your future.

Of course, as mentioned earlier, there is absolutely nothing stopping you from saving into both an ISA and a SIPP and taking full advantage of all the flexibility and tax efficiency they offer.

Get in touch

If you would like expert help in saving for your retirement and would like to discuss your options, we can help. Email or call us on 01275 462 469.

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