SIPP vs ISA

Which one is best? Which one is best for retirement? Which one is best if you’re young? The SIPP or ISA decision raises a lot of questions.

We’ll weigh up SIPPs and ISAs and suggest a few things to help you decide which tax-efficient investment account might suit you best.

Spoiler alert - it’s unlikely to be a knock-out.

Before we start, it’s important to understand that the value of your investments can fall as well as rise, so you might get back less than you originally invested. You also need to be aware that SIPP, ISA and tax rules can and do change and any tax treatment will depend on your individual circumstances. This article should not be read as personal investment advice, you should make your own decisions about which investments are right for you or seek independent advice.

SIPP vs ISA: the facts

Before we get into the analysis, let’s check we’re on the same page when it comes to what makes an ISA an ISA and a SIPP a SIPP.

There are a few key similarities between the two investment accounts.  

Both are designed to help you save. Both give you access to the stock market. Both are built around tax efficiency (to help you keep more of your investment gains). And both have limits to how much you can put in every year.

But there are also a few major differences that could mean one account clearly suits you and your plans better.

Stocks and shares ISA: the lowdown

• Stocks and shares ISAs are the type of ISA that’s been designed as a home for your investments.
• ISAs are tax wrappers which means you get to keep any money you make from your investments without having to pay it to the taxman.
• That means you won’t pay income tax on any UK dividends or interest and you don’t need to worry about capital gains tax if you sell your investments for a profit.
• This tax year you can put up to £20,000 in ISAs, this allowance can go in one ISA or across different types of ISAs (e.g. stocks and shares ISA and cash ISA).
• You can take your money out at any point and withdrawals are tax-free (although this will likely impact your annual ISA allowance).
• People start investing in stocks and shares ISAs for all sorts of reasons. Often it's to invest for something specific in 5, 10, or 15 years’ time or as part of retirement savings.

Self-invested personal pension (SIPP): the lowdown  

• SIPPs are designed to help you build up a pension pot you can use later in life.
• You can’t access anything in your SIPP until you reach at least 55 years old (rising to 57 in 2028).
• Most people can put up to £60,000 or 100% of their earnings (whichever is lower) into pensions (so includes workplace and personal each tax year).
• The government tops the contributions you make (up to a certain amount).
• You have complete control when it comes to how your SIPP is invested.
• You can have a SIPP in addition to your workplace pension and ISAs (just remember both types of pension count towards your annual allowance).

💡 For more check out our ISA guide.

💡 For more check out our SIPP guide.

SIPP vs ISA: contributions (how much can you put in)

What’s the same?

Both SIPPs and ISAs have annual allowances that guide how much you can save each year and still enjoy the tax benefits.

Both annual allowances run in line with the tax year (5 April - 6 April), which means the current tax year and its allowances end at midnight on 5 April 2024. After this point, we’re into a new tax year, with new allowances (although they’ll be staying the same for the coming tax year).  

How much can you put in an ISA?

You can currently save up to £20,000 into ISAs each tax year.

And as we mentioned before you can split this allowance across different types of ISAs (say a cash ISA and a stocks and shares ISA) or you could put the whole £20,000 into a stocks and shares ISA.

The key thing to know about the ISA allowance is that it’s use it or lose it. Once the tax year resets, a new ISA allowance is in force and you can’t carry forward any unused allowances.

💡 How to make the most of your ISA allowance.  

How much can you put in a SIPP?

With SIPPs, there’s a bit more to the annual allowance.

Most savers can put up to £60,000 or 100% of their earnings (whichever is lower) into pensions in a tax year. And this allowance includes all types of pension. That includes personal pensions (e.g. SIPPs, ordinary and stakeholder) as well as workplace pensions.

There are a few different scenarios when your annual allowance might be different, and we’ve covered those in our pension tax relief guide.

The other key difference is that with a SIPP annual allowance you can carry over unused allowances from the previous three tax years. This is known as the carry forward rule and if you’re eligible it could mean you could put more than £60,000 in a SIPP in that tax year. Again, there’s more information on this in the pension tax relief guide.

What to think about?

If retirement feels like a lifetime away, the ISA and SIPP annual allowances alone are likely to feel a bit meaningless.

After all, using both allowances you could be investing up to £80,000 per tax year into tax-efficient accounts.

However, as your pension pot starts to grow and the lifetime allowance becomes more of a reality, you might need to be more strategic about the ISA or SIPP decision, to avoid any tax surprises.

This is where using both an ISA and a SIPP for your investments, could give you the flexibility you need.

It’s not always an either-or decision and if you’re trying to invest with the lifetime allowance in mind, there’s no reason why an ISA can’t become part of your retirement plan too.

SIPP vs ISA: tax benefits (making the most of your money)

What’s the same?

Inside both SIPPs and ISAs, your investments can grow free from some of the main UK investment taxes.

You won’t pay income tax on any dividends or interest that’s paid to you and you don’t need to worry about capital gains tax if you sell your investments for a profit.

Simply put this just means you get to keep more of any money you earn from your investments, be it income or profits.

There are a few investment-specific taxes neither account can protect you from and these are stamp duty (charged when you buy most UK shares) and the US government’s withholding tax on US dividends. For more info on both of these check out how are my investments taxed.

Beyond this, the key difference between ISA and SIPP tax benefits is when they happen. ISA tax benefits come when you want to take your money out of an ISA whereas the biggest SIPP benefit comes earlier on in the investment journey at the point of investing.

ISA tax benefits

Tax-free growth (we know this already), tax-free withdrawals (if you sell any of your investments, you get to keep the lot) and less tax admin (you don’t need to fill in a self-assessment tax return).

SIPP tax benefits

SIPP tax benefits are pretty generous and quite unique in investment accounts land (...oh what a land it is).

We’ve already covered the tax-free growth that happens when your investments are inside a SIPP.

The two other key things to know about are tax benefits on the way into a SIPP and the tax situation on the way out of a SIPP.

Tax benefits on the way in

When you add money to your SIPP in line with your annual allowance, the government will top up any contribution you make via tax relief.

This top-up provides an all-important boost to your retirement funds.  

Everyone gets basic rate tax relief added (20%). This means if you add £80 to your SIPP, your SIPP provider will collect £20 (i.e 20% tax relief) from the government and add it into your SIPP directly. This makes your total pension contribution £100.

Or put another way, your £100 contribution actually costs you £80.

For higher-rate and additional-rate taxpayers, the tax relief is likely higher, which in effect reduces the cost of your contribution even further.

There are a few ins and outs to how this works, which we’ve explained in our pension tax relief guide.‍

Tax benefits (and potential costs) on the way out

You can access your SIPP once you reach 55 years old (or 57 from 2028).

There are a few routes to market when you take money out, which we cover in our SIPP guide, but the important thing to know is that you can take 25% of your SIPP tax-free. How you do it is up to you, but anything you take out beyond this 25% will be taxed at whatever rate of income tax you pay at the time.

This is really just something to keep in mind when you get closer to taking money out of your pension and making sure you do it in the most tax-efficient way.

What to think about?

If you put the same amount of money into an ISA and a SIPP each month (keeping everything else the same and assuming you stay within your allowances), your SIPP investment pot will grow to be bigger than your ISA.
That’s just the maths (and the magic) of tax relief. An £80 ISA contribution remains an £80 ISA contribution. But your £80 SIPP contribution should become at least £100 in total (inside the SIPP) thanks to tax relief. Over time, these boosted SIPP contributions all add up.

But while this comparison is useful when thinking about the potential benefits of saving for your retirement using a SIPP, it’s important to keep in mind that you won’t be able to access any money from your SIPP until 55 (at least).

Cue the next section.

SIPP vs ISA: accessing your money

What’s the same?

Not much.

When you can take your money out is a key differentiator between SIPPs and ISAs.

When can you take your money out of an ISA?

Stocks and shares ISAs let you take your money out whenever you like. So while we’d encourage you to stay invested for as long as feasible, there’s no time limit you have to reach.

This makes ISAs a useful account when you’re saving for something in particular and you’ll need to use the money in 5, 10 or 15 years.

It’s worth noting though that when you take money out of your ISA (with most ISAs) you’ll lose your tax-free allowance.

What does this mean? Say you’ve added £16,000 to your stocks and shares ISA this tax year and you withdraw £2,000. While the amount left in your ISA is now £14,000, the remaining amount you can put into your stocks and shares ISA this year is still £4,000.

If your ISA is a flexible ISA, the rules will be different and you can take money out of your ISA and put it back in again without it affecting your annual ISA allowance.

💡 For more on this take a look at stocks and shares ISA rules.

When can you take your money out of a SIPP?

SIPPs are stricter.

Once your money is inside a SIPP, you won’t be able to access it until you reach at least 55 (rising to 57 from 2028).

This is not necessarily a bad thing.

So long as you won’t need the money, not being able to touch it could work in your favour. It could be the discipline you need to leave your investments for the long term.

What to think about?

ISAs could be a good place for your nearer-term investments. You’ll be able to access your money before 55 so they allow for a bit more unpredictability.

SIPPs on the other hand are for the long term and beyond. As we said, the necessary discipline needed to build up your retirement pot is built-in.

You’ll likely need a combination of both accounts over your lifetime. This way you can plan and invest for different life events.

SIPP vs ISA: investments, risk and return  

What's the same?

A lot.

When it comes to the investments themselves there aren’t many limits on what you can hold in a SIPP or an ISA. And both accounts are designed for you to decide what you invest in.

Some of the things you can hold in ISAs and SIPPs include shares, bonds, investment trusts and ETFs. The combination is up to you.

Very short time horizons should be met with the question of whether you should be investing at all. That’s where cash might suit.

After that, it's a case of how much risk you can afford to take.

Longer time horizons should mean you can take more risk and dial up the proportion of shares in your portfolio. This is because longer time frames tend to mean you’re less sensitive to the ups and downs of the market over the short term.

Stocks and shares ISA investments

How your ISA is invested really depends on what your ISA is for

If it's to save for later life, there’s no reason why your ISA investments should look any different to your SIPP investments.

With nearer-term goals or for any investors uncomfortable with the idea of big movements in the value of their investments, building a portfolio that includes both riskier assets (like shares) and those that provide steady income (such as bonds), could be a more appropriate option.

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SIPP investments  

What’s in your SIPP in your 20s and 30s should look a little different to your 50s and beyond.

Time is on your side when you’re young, particularly since you can’t touch the investments until you’re at least 55 years old (and likely older).

As you edge closer to retirement age and are working less, you’ll probably want a bit more certainty when it comes to the value of your SIPP investments and the income they could provide.

That’s why we tend to see a shift from share-heavy SIPPs in the earlier years towards assets that tend to hold their value in the short term, like cash or bonds as people get closer to using their SIPP.

But it’s important to call out that 55 doesn’t equal retirement.

Many of us will continue to work (whether it’s because we have to or not) beyond that. It also means 55 is not the age when saving for retirement ends. We’ve potentially got another 30 or 40 years to fund. And this means we’re likely to need to keep shares in our portfolio for a lot longer.

Why? Because having an income in retirement is nothing new, but having to fund it yourself is.

Pensions offering guaranteed benefits (like defined benefit pensions) are much rarer these days. And following the UK government’s pension freedoms in 2015, we no longer have to use our pension to buy an annuity, which is another form of guaranteed income.

You also can’t get the returns on cash or bonds like you used to historically.

So if we don’t opt for an annuity (and since the pension rules changed in 2015, not many of us do) it’s up to us to work out how to build up a pot to live off in later life.

All isn’t lost though, it is doable. The key is to front load and start early, giving you time to benefit from the best growth investment ingredient: time.

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

What to think about?

Start with the reason why you’re investing and this should help guide what investments to choose and in which account.

If your goals are to invest for retirement or to cover the costs of later life, exactly how much you’ll each need in retirement will be different. But everyone can benefit from starting to invest sooner rather than later. It’s costly and challenging to try and replace this growth later in life.

Enter: compounding. Compounding is not a direct source of income like capital gains or dividends, but it’s one of the greatest benefits of long-term investing.

In its simplest form, compounding is growth on an already growing investment pot. And the longer you can give it, the more powerful it becomes.

This chart shows compounding in action. Both £1,000 investment pots grow at 5% each year but the pot that was invested when you were 25 grows to a much bigger size. It’s time, not extra cash that’s created this difference.

Disclaimer: Please note this chart is just an example and is not a guide to realistic returns. Continuous 5% growth is not realistic, some years it could be more and some years less. Investments can rise and fall in value, so you may get back less than originally invested.

The later you start contributing to a pension the less growth you’ll see and the bigger the gap you’ll have to fill.

And this is even before considering any potential increases in the amount you contribute.

SIPP vs ISA: passing on your money

What’s the same?

Not much.

SIPPs and ISAs are quite different when it comes to inheritance tax.  

ISAs and inheritance

When you die, your ISA investments become part of your estate for inheritance tax purposes (where the standard tax rate is 40% on your estate's value above £325,000).

You can leave the money in your ISA to anyone you wish to in your will. However, your spouse or civil partner can also inherit your ISA allowance as a one-off boost to their own allowance.

For example, let’s say you have an ISA worth £30,000. When you die, your spouse or civil partner will get an additional one-off ISA allowance of £30,000 as well as their own standard ISA allowance (which is £20,000 this year).

This means your spouse or civil partner can inherit the money in your ISA and its tax-free status too.

SIPPs and inheritance

SIPPs can be passed on free of inheritance tax to any nominated beneficiary but for this to happen it's crucial to let your pension provider know who you would like your SIPP money to go to by completing an expression of wishes form (if you have a Freetrade SIPP this is something you can talk to us to sort and you can check on your beneficiaries in your app).

You can nominate multiple people as your SIPP beneficiaries and even specify the share of your SIPP you’d like them to receive. A spouse could be the main beneficiary along with other people to be considered.

Nominating who you’d like your SIPP money to go to is not just important to make sure your wishes are known but to also ensure your beneficiaries have a choice in how they inherit your SIPP. So long as they’re nominated, the SIPP benefits can be paid as a lump sum or as a drawdown pension (as long as your pension plan allows this). The drawdown route ensures the pension remains a pension with its tax-efficient wrapper.

There are some other rules to know about when it comes to SIPPs, death and taxes. And the key one is whether you die before or after reaching age 75.

If you die before the age of 75 your SIPP can be inherited both inheritance and income tax-free.

If you die after the age of 75, whoever inherits your SIPP will have to pay income tax on it. The tax will be charged at their marginal rate of tax (ie. the tax rate they’d pay on the next £1 of income).

What to think about?

To make sure your SIPP has the best chance of going to whom you’d like and in the most tax-efficient way, it’s crucial to fill out the expression of wish form. You can do this at any point with your SIPP provider.

When it comes to thinking about SIPP or ISA in the context of inheritance tax, with your ISA ending up as part of your estate, it could make sense for you to use the money in your ISA instead of your SIPP later on in life.

ISA withdrawals are tax-free too, so you wouldn’t have to worry about income tax, unlike with pension income.  

This is an important consideration when it comes to inheritance tax (IHT) planning and something good to know about early on, so you have time to build up both a pension and ISA pot. It’s also why it’s a good idea not to rule one account out and instead keep both accounts in mind over your lifetime.

IHT planning is one of the more complicated areas of financial planning. So while doing your homework is a good place to start, it’s often something people speak to a financial advisor about too.

SIPP vs ISA: which one is better for you?

Here we go then, the SIPP vs ISA weigh-in.

So, self-invested personal pensions or stocks and shares ISA? Or both?

Hopefully, we’ve shown that while both accounts have their specialisms, saving regularly into both a SIPP and an ISA could be a good call.

If you’re looking to build up that nest egg for life post-work, a SIPP helps prevent the temptation to dip into your savings, because you can’t. The tax relief top-ups will also help.

SIPPs also bring the ability to tidy up old workplace pensions and keep them in one place (but it’s important to check that by transferring you won’t be worse off or lose any generous benefits).  

On the other hand, if you have some nearer-term goals like a house deposit or school fees, you’ll need flexibility.

And that’s where the ISA wins - hands down.

A combination of the two, working side by side with different objectives in mind, can be a great compromise.

After all, the glory of compounding only kicks in when you give all your accounts the time they need to build up that momentum. Having them work alongside each other makes sense.

SIPP vs ISA: just tell me what to do…

Answers to a few quick-fire SIPP vs ISA frequently asked questions.

SIPP or ISA: which is better for long-term investing?

SIPPs and ISAs are both good options for long-term investing.

The deal-breaker will likely be when you’d like to access your money and what you plan to spend it on.

SIPP or ISA: which is better for retirement?

Both SIPPs and ISAs can be used for retirement savings. But if it’s definitely retirement and life beyond 55 years old you’re investing for, this is what SIPPs were built for (don’t ignore the tax relief top-ups).

If you’re employed, make sure to check first if increasing contributions to your workplace pension would be more beneficial than a SIPP. Some employers will match your contributions, so this option could be worth making the most of first.

SIPP or ISA: is one better for young investors and one for old investors?

The answer to this question is less about age and more about what you’re investing for and when.  

ISAs can be useful if you have a specific thing you’re saving for. Perhaps you're investing for a housing deposit in 10 years’ time or something in that realm extension. They could also be useful for anyone who needs to be careful about reaching the pension lifetime allowance.

SIPPs again can be useful for investors of all ages. We’re all living longer which means we’re likely going to need sizeable pension pots. Whether you’re just starting out saving for retirement or you realise you need to save more, SIPPs can be useful thanks to the tax relief boost. Generally, you can continue to keep building up your SIPP and benefit from tax relief until you’re 75 years young.

SIPP or ISA: which can make you a millionaire first?

If only it was that easy.

Your goal of one million pounds will be determined first and foremost by what you invest in and how much you invest over time. So the answer could be your SIPP or your ISA - or both.

With a SIPP, the pension tax relief top-ups provide an important boost but that £1m is far from guaranteed. To give yourself the best chance in either account, you’ll need to contribute regularly to a diversified portfolio.  

Read more:

💡 The (more realistic) ISA millionaire

💡 How much you need to retire

💡 Mistakes to avoid when transferring your ISA

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Important information

When you invest, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you invest.

The value of your portfolio can go down as well as up and you may get back less than you invest.

This should not be read as financial advice and individual investors should make their own decisions on what investments are right for them or seek independent advice.

ISA and SIPP eligibility rules apply. Tax treatment depends on your personal circumstances and current rules may change. US dividends received into your SIPP may be subject to US withholding tax. 

A SIPP is a pension designed for you to save until your retirement and is for people who want to make their own investment decisions. You can normally only draw your pension from age 55 (57 from 2028), except in special circumstances. 

At present, Freetrade only supports Uncrystallised Fund Pension Lump Sums (UFPLS) for customers who wish to withdraw funds from their SIPP after their 55th birthday. We strongly encourage you to seek financial advice before making any withdrawals from your SIPP.