I’m thinking of adding to my stake in Lloyds Banking Group (LSE: LLOY), so is it better to invest via a Self-Invested Personal Pension (SIPP) or Stocks and Shares ISA? Both wrappers help shield returns from tax, but do it in different ways. Torn between the two, I decided to ask ChatGPT.
Two ways to invest
I’d never ask artificial intelligence to help me pick stocks. It makes too many mistakes and doesn’t really think for itself, instead regurgitating whatever information it scrapes together. But I thought it might cope with a technical question like this.
It said an ISA keeps things simple. Money goes in from taxed income, but all dividends and share price growth can be taken free of tax. ISAs are also flexible, as funds can be accessed at any time.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
SIPPs work differently. Contributions attract tax relief at the investor’s marginal rate, instantly boosting the amount invested. A basic-rate taxpayer who puts in £8,000 will see that topped up to £10,000, while higher earners can reclaim more via their tax return.
One trade-off is access. Pension money is locked away until at least age 55, rising to 57 from 2028. Tax is another. On withdrawal, 25% can usually be taken tax-free, but the rest is taxed as income.
Tax pros and cons
That was fairly generic, so I pushed ChatGPT further and asked whether the type of share might tip the balance. The stock I picked was Lloyds. Many buy the FTSE 100 bank for its dividend income, but recently it’s delivered strong growth too.
The Lloyds share price is up 78% over the last year and 185% across five years, with all dividends on top. After such a run, the price-to-earnings ratio has climbed to 16.2, so it’s no longer the bargain it was. Growth may slow from here, especially if falling interest rates squeeze margins, but I still think it’s worth considering, particularly for long-term dividend income.
The rising share price has cut the trailing yield to 3.15%. However, dividends have been rising at around 15% a year and are expected to yield 3.6% this year and 4.2% the year after. So it should steadily climb higher over time. So did that make it more suitable for an ISA than SIPP?
Lloyds for income and growth
At this point, ChatGPT lost its way, serving word salad, as it often does when out of its depth. So here’s my take. I fancy putting dividend shares in an ISA, where all of my income can be drawn entirely free of tax. Given today’s frozen income tax thresholds, that matters more than ever. Lloyds fits nicely there.
In a SIPP, once the 25% tax-free cash is taken, three-quarters of the dividends could end up taxed. However, doing this does mean sacrificing that initial upfront tax relief. So there’s no one-size-fits-all answer. Ultimately, it comes down to the individual investor. Which is probably why ChatGPT struggled.
Overall, it makes sense to split money between the two wrappers to enjoy different tax benefits. But I’d lean towards holding more income shares in an ISA, and take a regular stream of dividends without worrying about the tax bill.
