Should I invest in a SIPP or an ISA?

There has never been a better range of self-investment pension options on the market, ranging from ever-popular Individual Savings Accounts (ISAs), to ‘do it yourself’ Self Invested Personal Pensions (SIPPs). But how do you decide which is right for you? And should you consider both?

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results

Pension planning can be a daunting task, particularly when you are managing your own money. But the options are greater than ever before with both stocks and shares ISAs and SIPPs offering access to a wide range of investment vehicles. Both benefit from tax-free incentives, but how do you decide which is right for you?

As the table below shows, SIPPs and ISAs have a lot of similarities, and a few key differences. Read on to find out which one fits best with your pension goals.

A comparison of the main features of SIPPs and ISAs

Minimum contribution Depends on the SIPP provider None
Maximum contribution 100% of your annual earnings before tax, up to a limit of £40,000. Anything beyond this will be subject to taxation Currently £20,000 per year for Cash ISAs and Stocks and Shares ISAs (2017/18).

The upcoming Lifetime ISA has a limit of £4,000 per year
Key benefits Access to a wide range of different asset classes.


Many SIPP providers will also offer a sophisticated fund management service
Tax free savings, which will multiply over the years as a result of compound interest.

With Stocks and Shares ISAs, you have access to potentially higher market returns.

All LISA investments are topped up with a 25% government bonus each year
Extra charges Most providers will charge a transfer fee, and there is a charge every time you buy or sell assets within your SIPP. Some will also charge an annual management fee and a set-up fee Cash ISAs and LISAs generally incur no charge.


Stocks and Shares ISAs will be subject to transfer fees, buying and selling charges, and possibly fund management fees
Ability to change portfolio Easy – but every time you buy or sell assets you will have to pay a small fee (usually between £5 and £15) Easy. If you are investing in a Stocks and Shares ISA, you can control the overall liquidity of your portfolio.
Early access As with any pension scheme, you will incur a penalty if you withdraw money from your SIPP before you are 55 years old, and you will have to pay HMRC between 55% and 70% of the sum.


On your 55nd birthday, you can choose to take 25% of your pension in cash, tax free
If you remove any money from any ISA, your annual allowance will be adjusted down by the withdrawn amount. Some ISAs will lock away your money for five or ten years at a time.

If you withdraw early from a Stocks and Shares ISA, you may have to pay a management fee.

Early withdrawal from a LISA will incur a 5% fee and you will have to refund your government bonus


How do you create a pension fund from an ISA?

ISAs have historically been viewed as recreational saving schemes, but with the annual tax-free ISA allowance surpassing £15,000 (and rising to £20,000 in 2017/18) more and more people are starting to use them as private pension funds.

Over the past few years, ISAs have evolved away from the traditional ‘slow and steady’ model of the past. While you can still invest in a Cash ISA with a low but guaranteed interest rate, the new ISAs offer access to an array of financial instruments, tax-free.

Stocks and Shares ISAs allow investors to create a bespoke portfolio and reap potentially high returns year-on-year by investing in a wide variety of funds, shares, stocks and bonds.

Meanwhile, the Lifetime ISA (LISA) has a completely new take on long-term savings. Set to be introduced next year (2016/17), each LISA user will be entitled to a 25% bonus, on annual savings up to the value of £4000. However, if you are investing for a pension and you withdraw from your LISA before you are 60 years old then the government element bonus will be returned and a 5% charge applied. 

Over time, ISA savings can really add up, particularly if you are gaining double digit returns from your Stocks and Shares portfolio. What’s more, you can access your ISA funds – tax free – at any time before your retirement, so your money is there in case of an emergency.

How do you create a pension fund from a SIPP?

A SIPP is essentially a Do-It-Yourself pension fund. Rather than trusting your savings to a large pension provider, you take charge of them yourself. You decide what you do and do not want to invest in, and you can tweak and change your portfolio over time. If you make good investment decisions, you can see annual returns of 10% or more, and compound interest can turn these returns into a sizeable sum over the decades.

Through a SIPP, you can invest in almost any asset class, from emerging markets, to government bonds, and equities. You can include Exchange Traded Funds, or ETFs, giving you exposure to a wide range of assets prices, including indices. You can even invest in gold bullion – as of June 2016, SIPP investors can purchase a share of a 400oz (11.43kg) gold bar. Once bought, the gold is stored in The Royal Mint’s highly-secure on-site vault, where it is inspected by the Queen once a year.  

As more and more asset classes are added to SIPPs, they are becoming one of the most diverse forms of pension investment. However, as with any pension fund, investors must be prepared to lock away their money until their 55th birthday, as early withdrawal will incur heavy penalties.

Understanding taxation

SIPPs and ISAs are both protected from taxation, but in slightly different ways. With SIPPs, you are eligible for tax relief on your initial contributions, but you are taxed on your entire amount once you start withdrawing it. However, you may be in a lower tax bracket after you retire, which means that you may only be paying a tax rate of 20% (as opposed to 40% or 45%).

You can also take 25% of your pension pot as a one-off cash payment, completely tax-free at the point of retirement. ‘This is unique to pensions and it is the reward for locking your pension away long term,’ says Adrian Boulding, director of policy at NOW Pensions. ‘However, don’t lock it in a pension if its money that you might need before your retirement.’ 

So should you invest in a SIPP or an ISA?

In the end, the final decision will depend on your personal circumstances and your pension goals. The most important thing is to save something. It may be that you want to use both vehicles.  

‘We need to get people to get saving more,’ says Boulding. ‘Actually putting some money aside is as important as choosing which investment option you use.’

Recent data from the Office of National Statistics showed that just 35% of adults aged 16 or over are currently paying into a private pension, while other reports have found that there is a significant income gap in the average retirement fund. As the state pension age increases, early retirement will only be an option for those people who can fund their own pension. By taking advantage of tax-free incentives and making your savings work as hard as possible, you can ensure that you have the best possible quality of life, for the rest of your life.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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