SIPP vs ISA: Which is right for you?

Deciding between a SIPP and an ISA can be one of the most important choices for your financial future. 

Both accounts are tax-efficient and shelter your portfolio from taxation as it grows, but they also offer a distinct array of features and allowances. Find out which is right for you, and even if you might want both a SIPP and an ISA. 

What is a Self-Invested Personal Pension (SIPP)?

SIPPs are a key tool for building your pension pot. They give you greater control over your investment choices whilst providing substantial tax advantages through government contributions and tax relief.

Key SIPP Features:

• Annual allowance typically up to £60,000 or 100% of earnings (whichever is lower)
• Unused allowances can be carried forward for three years with the carry-forward rule
• You can't touch the money until age 55 (rising to 57 in 2028) 
• Tax-free growth and partially tax-free withdrawals (usually 25% of your pot)
• The government automatically boosts your contributions via tax relief
• Complete investment control over a wide range of assets
• You can have a SIPP alongside your workplace pensions and ISAs

💡 For more, check out our SIPP guide.

What is a Stocks and Shares Individual Savings Account (ISA)?

Stocks and Shares ISAs are tax wrappers designed to shelter your investments from UK taxation. Unlike a SIPP, they offer greater flexibility and immediate access to your money if you need it.

Key Stocks and Shares ISA Features:

• Annual allowance of £20,000 for the current tax year
• "Use it or lose it" annual allowance system
• No age restrictions to access your money
• Tax-free growth and income, and completely tax-free withdrawals
• Access your money anytime without penalties or restrictions (though these accounts are best for long-term investments)
• Total investment control over a wide range of assets
• You can split the allowance across different types of ISA (Cash ISAs, Stocks and Shares ISAs, or others)

💡 For more, check out our ISA guide.

SIPP pros and cons

Pros:

• Substantial tax relief benefits: The government provides an upfront pension tax relief of 20% to all contributions in 'relief at source' schemes. Higher and additional rate taxpayers can claim even more.‍
• Encourages long-term saving: SIPP funds being locked until age 55 (rising to 57 from 2028) can help you stay focused on building a pension pot for retirement, giving your investments time to grow.‍
• Higher contribution limits: The £60,000 standard annual allowance (or 100% of earnings, whichever is lower) provides three times more tax-efficient saving capacity than ISAs. ‍
• Carry forward flexibility: Unused pension allowances from the previous three tax years can potentially allow you to make contributions over £60,000 in a single year. 

Cons:

• Restricted access until 55: Money is locked away until at least age 55 (rising to 57 in 2028), making SIPPs unsuitable for some financial goals.
• Taxable income: 25% of your pension can be taken tax-free, but all remaining withdrawals are taxed as income at your marginal rate. ‍
• More complex rules and regulations: SIPP contributions can involve a bit more complexity than ISAs, with annual allowance tapering for high earners and various technical rules to navigate.

Stocks and Shares ISA pros and cons

Pros:

• Complete access flexibility: You can access your money whenever you need it, regardless of your age. This means ISAs can feasibly be used for retirement savings, house deposits, education costs, emergency funds, and more.
• Tax-free withdrawals: Money withdrawn from a stocks & shares ISA is tax-free. 
• Simplicity and transparency: ISAs have straightforward rules. You invest money, it grows tax-free, and you can withdraw it tax-free. Simple.

Cons:

• No government contribution: Unlike SIPPs, ISAs don't receive a tax relief boost from the government. Your £100 contribution remains £100, missing the immediate enhancement that SIPP tax relief provides.
• Lower annual limits: The £20,000 annual allowance provides only one-third of the tax-efficient saving capacity offered by SIPPs, potentially limiting wealth accumulation.
• No carry-forward provision: Unused ISA allowances can't be carried forward to future years. If you don’t use it, you’ll lose it.
• Inheritance tax exposure: ISAs form part of your estate for inheritance tax purposes.

What are the differences between SIPPs and ISAs?

Should I invest in an ISA or a SIPP?

Both Freetrade SIPPs and ISAs are available with no monthly fees. If you are not sure which you need, you can find out more and explore the app by starting with Freetrade Basic.

Remember, you don't have to choose just one type of account. Many successful investors need to use both accounts strategically throughout their lives. Freetrade’s guide to maximising your annual allowances might help you decide which option is best for you. 

SIPP vs ISA - FAQs

Is it better to pay into a SIPP or an ISA?

The most effective approach often involves using both accounts throughout different life stages. This gives you the best of both worlds: immediate tax benefits, long-term growth potential, and ultimate flexibility.

Should I have a different investment strategy for each account?

Your asset allocation should reflect your time horizon and risk tolerance rather than the account type. Longer time horizons typically support higher equity allocations for growth potential. 

When should I start investing in an ISA or SIPP?

Compound growth is a big deal in the investing world. The returns you earn start earning returns themselves, which creates a snowball effect. This means investing early can dramatically improve outcomes regardless of which account you choose.

Is a SIPP or ISA more flexible?

ISAs are more flexible than SIPPs, as you can access your money at any time rather than having to wait until you are 55 (57 from 2028).

Can you get 40% back on SIPPs?

If you are a higher-rate taxpayer, you will receive 40% pension tax relief on contributions to your SIPP. Basic rate payers receive 20%, and additional rate payers receive 45%. Freetrade automatically reclaims 20% on contributions. If you are entitled to additional relief, you will have to claim this directly from HMRC. 

What are the disadvantages of a SIPP?

The key disadvantage of a SIPP is that your money is locked away until you reach 55 (57 from 2028). Other features of a SIPP account may prove to be a disadvantage depending on your circumstances.

Is it too late to invest in your 50s?

It is never too late to start investing, but your age may have an impact on your investment strategy. If you are nearing retirement, it may be wise to invest more cautiously than a younger person with decades ahead of them to smooth out any dips in their portfolio value.

💡 Take a look at our pension investment strategies for 20s and 30s or 40s and 50s.