SIPP vs LISA: Which is your best option?

Choosing between a SIPP or LISA as the best place for your money is a question of priorities. Both can offer a tax-efficient way to save or invest for the future, but suitability depends on your age, tax position, and financial goals. 

Find out which account might be best for you in this comprehensive comparison of eligibility, rules and government bonuses.

What is a SIPP?

In basic terms, a Self-Invested Personal Pension (SIPP) is a type of pension. 

It allows you greater control over how your retirement pot is invested than more traditional alternatives, such as workplace pensions. For example, with Freetrade’s SIPP you can choose between over 7,000 different investments.

SIPPs are tax-efficient accounts, so investment growth and interest on cash are not taxed. 

For more information, check out Freetrade’s full guide to SIPPs.

What is a LISA?

A LISA is also a tax-efficient account, and is one of several different types of ISA. It is designed as a product to help those saving to get onto the property ladder, or for retirement.

The key incentive of a LISA is that you receive a 25% government bonus for all contributions. Note that this bonus is on contributions NOT interest or investment growth.

You can only contribute £4,000 per tax year into a LISA, and this amount also falls under your annual ISA allowance. 

Lifetime ISA vs SIPP comparison

Eligibility: Who can open a SIPP vs LISA?

SIPPs:

• You must be an adult under the age of 75.
• A UK resident for tax purposes.

LISAs: 

• Must be an adult under the age of 40. 
• Must be a UK resident OR an armed forces member or a crown servant living abroad. 

Annual limits and contribution flexibility

SIPPs:

• Most people can contribute up to £60,000 or 100% of annual earnings (whichever is lower) each tax year.
• You can carry forward unused allowances from the last three tax years. 

LISAs:

• You can contribute £4,000 per tax year to a LISA. 
• You cannot carry forward unused allowances.
• You cannot make contributions after age 50. 

Government support: SIPP tax relief vs LISA bonus

SIPPs: 

• Contributions within your pension annual allowance receive pension tax relief. 
• Basic rate taxpayers receive 20% relief. A £100 contribution effectively costs £80. 
• Higher rate taxpayers get 40% relief. A £100 contribution effectively costs £60.
• Additional rate payers get 45% relief. A £100 contribution effectively costs £55.
• Basic rate relief is automatically claimed for all contributions, but higher and additional rate taxpayers need to reclaim additional amounts through self assessment tax returns.

LISAs:

• Contributions receive an automatic 25% bonus. 
• A £100 contribution effectively costs £80. 

Withdrawals: Access age and tax treatment

SIPPs:

• You cannot usually withdraw from a SIPP until age 55 (age 57 from 2028). 
• The first 25% of your pension is tax-free.
• Further withdrawals are subject to income tax. 

LISAs: 

• You withdraw automatically when purchasing a first home for £450,000 or less. It must be purchased with a mortgage. 
• You can also withdraw from from age 60. 
• LISA withdrawals are not subject to tax.

Early withdrawals and penalties

SIPPs:

• Early pension withdrawals face a tax charge of up to 55%. 
• You may be able to take your pension early if you are expected to live for less than a year. 

LISAs:

• Early withdrawals usually subject to a 25% penalty. 
• If you are expected to live less than a year, you can withdraw early without a penalty.

Which is better: SIPP or LISA for retirement investing?

Which is better may come down to basic maths.

If you are a basic tax rate payer, the 20% tax relief you get on pension contributions is equivalent to the 25% government bonus offered through a LISA. 

So a £100 SIPP contribution and a £100 LISA contribution both cost £80.

However, for higher or additional rate payers, the corresponding relief of 40% or 45% may make a SIPP a better choice. 

A £100 SIPP contribution would cost £60 for a higher rate payer, and £55 for an additional rate payer. 

In addition, you can generally contribute larger amounts over a longer period into a SIPP, and under current rules you can withdraw from the account earlier.

Can you have both a SIPP and a lifetime ISA?

You don’t NEED to pick between a SIPP and lifetime ISA, as you can have both. 

Can you transfer a LISA to a SIPP?

You cannot transfer a LISA directly into a SIPP. If you wanted to move money from a LISA to a SIPP, you would need to withdraw it from the LISA and then contribute it to your pension pot. 

If you are under the age of 60, withdrawing from your LISA would result in a 25% penalty.