British investors are blessed with two excellent tax shelters, the Self-Invested Personal Pension (SIPP) and the ISA. The Stocks and Shares ISA may be the better known of the two, but the SIPP also lets portfolios grow in a tax-efficient environment. So is one better than the other?
I’ve given up on asking ChatGPT to help me choose actual stocks to invest in as its answers are just too erratic and all-too-often inaccurate. And today, it confidently assured me that Rachel Reeves isn’t the UK’s chancellor, for example. And it’s made equally big howlers when talking about FTSE 100 companies.
Tough tax choice
So I thought it might be better to suited to an alternative technical task, namely which is the better option, a SIPP or an ISA? The chatbot started with the SIPP. It said the big attraction is upfront tax relief on contributions. A basic-rate taxpayer puts in £16k and the government tops it up to £20k. Higher-rate 40% taxpayers can reclaim another £4,000 back through their tax return. Ignoring this tax break is like turning down free money.
There’s a trade-off. Money’s locked away until at least age 55, rising to 57 from 2028. SIPP withdrawals beyond the 25% tax-free lump sum are taxed as income. From April 2027, Inheritance Tax (IHT) may apply on any unspent pot.
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.
Freedom and flexibility
An ISA lacks that upfront tax relief but offers more freedom and flexibility. Money grows free of tax, can be accessed at any time, and every penny is free of income tax and capital gains tax for life. ISA tax benefits can even be passed on to a spouse or civil partner on death, but when they die IHT may apply.
Mixing the two can make sense. A SIPP can cut tax bills on the way in, while an ISA reduces tax on the way out. I have more money in my SIPP, so will put my £20,000 into an ISA this year.
Games Workshop Group’s flying
That led to the next question. What might sit inside those wrappers? This is where I stop asking artificial intelligence (AI) for help.
Instead, I ran the rule over Games Workshop Group (LSE: GAW), whose incredible run has driven the stock into the FTSE 100. The shares have fallen 6.6% over the last month but are still up 25% over one year and 95% over three.
Half-year results published on 13 January looked solid enough, with sales up 10.9% to a record £332.1m, driven by strong global demand for its Warhammer figurines. The problem wasn’t performance but expectation. The price-to-earnings ratio sits around 32.5, well above the FTSE 100 average near 18. That’s a lot for Games Workshop to live up to.
Investors are also waiting to see how Amazon‘s TV streaming series Warhammer, based on the game, lands. It could broaden the audience dramatically or tarnish the brand by disappointing its loyal army of fans.
Given that valuation, I think investors should do careful research before considering Games Workshop. If they don’t fancy it, there are plenty more exciting early-stage growth stocks on the FTSE 250.
Whether investors use an ISA or a SIPP, or both, the approach is the same. Build a balanced portfolio, think long term and don’t leave ChatGPT to do the hard thinking. That part’s still down to humans.
