Should I invest through a SIPP or ISA… or both?
Saving isn’t always easy, thankfully there are some generous tax incentives out there that help to make things a little easier.
Two schemes that provide great tax benefits are the individual savings account (ISA) and self-invested personal pension (SIPP). Each offers tax incentives at different stages with distinct advantages- but which one is right for you?
The simplest way to answer that is to understand your investment goals and decide if they’re long or short term.
SIPP (Self-Invested Personal Pension)
A SIPP can be a great way of saving for retirement while minimising the tax you pay. With a SIPP You can also pick your own investments to match your goals and attitude to risk.
If you’re employed it could be worthwhile to look at increasing your employee pension contributions, as many employees will match the amount you pay in. For some, it could make sense to take advantage of that before investing elsewhere.
A SIPP will provide the same tax benefits as other pensions. For anything you invest the government will add a 20% increase in tax relief – even if you don’t pay tax.
For those who pay higher or additional rate tax, you can claim up to an extra 20% to 25% through your tax return.
Additionally, returns generated through a pension won’t be subject to capital gains or income tax.
As the money in your pension is set aside for retirement, you won’t be able to withdraw your funds until you reach 55 years of age (expected to be extended to 57 in 2028) This could be a useful feature for those looking to save for their future but who find themselves dipping into their nest egg unnecessarily from time to time.
Once you’re able to cash in your pension you will have the option to withdraw a lump sum, up to 25%, tax-free. Future payments will be taxed as income.
A pension is a great savings product; however, it is specifically designed for retirement. If you have more immediate goals such as a house deposit or saving towards a child’s education, an ISA may be better suited.
It’s important to point out, that this shouldn’t necessarily be thought of as an either-or decision: it may be worth thinking about a combination of the two.
ISA (individual Saving Account)
An ISA will allow you to grow your savings, either through cash or stocks and shares in a tax-efficient way. Unlike a SIPP you will be able to withdraw funds, tax-free, whenever you like.
Stocks and shares ISA versus SIPP
A stocks and shares ISA is a stocks and shares investment held within an ISA wrapper – so you can benefit from all the tax efficient features that come with an ISA. As this is an investment, it carries with it, a level of risk, but this also means your investment returns could be better than those of a cash ISA.
Signia Invest allows you to choose from a selection of investment portfolios to hold within your ISA, meaning you can choose a level of risk that’s suits your personal circumstances or investment goals.
With an ISA you are limited to investing £20,000 per tax year. There are no limits to how much you can invest in a SIPP, but the tax relief will only apply to a maximum investment limit of £40,000 per year.
Stocks and shares ISAs are also very flexible, allowing you to access your money when you need it and withdraw without paying tax, allowing you to keep all of the investment growth.
A SIPP offers less flexibility on when you can withdraw, and also withdrawals will be taxed after you have accessed 25% of your funds.
Ultimately, whichever wrapper you choose, you’ll benefit from some great tax advantages, but the decision is very personal to your own savings goals, current circumstances, and your age. For many people, a combination of pensions and ISAs can be the most effective way to save for themselves and their children.
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*Tax rules can change and are dependent on your circumstances. When investing, your capital is at risk. Learn more about risk here
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Important: Signia Invest does not provide personal advice. If you’re unsure as to whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in. Tax rules can change and benefits depend on individual circumstances. Past performance is not a guide to the future.
