With the annual contribution deadline for a Stocks and Shares ISA under a month away, many investors have their minds on ISAs. Doing so, though, ought not to mean neglecting the potential opportunities presented by a Self-Invested Personal Pension (SIPP).
Here are a couple of factors I reckon investors should weigh when considering whether to put money into an ISA or a SIPP.
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.
There’s usually a different yearly contribution limit
An ISA has an annual limit as to how much can be put in during a single tax year.
That is typically £20k across Stocks and Shares ISAs and Cash ISAs combined.
So if investing only in a Stocks and Shares ISA, £20k could be put in. (Junior ISAs and Lifetime ISAs have lower annual contribution limits).
What about pensions?
For ordinary rate taxpayers who do not take cash out (flexible access), the typical tax-free annual contribution limit to private pensions in a given tax year is £60k.
Therefore, depending on what other private pensions (if any) are held, someone’s SIPP may be able to receive up to £60k of contributions in a given tax year. That sum includes basic rate tax relief (as I explain below) and any other contributions (for example, from an employer).
Unlike an ISA, in some circumstances they may also be able to carry over some unused contribution allowance from prior tax years.
Thus for most investors, the annual contribution allowance for private pensions (including a SIPP) will be higher than for a Stocks and Shares ISA.
That means, even if an investor reaches their ISA contribution allowance, they may still have spare SIPP allowance (or vice versa).
SIPPs offer tax relief on contributions
For ISAs and SIPPs, money put in is taxed as normal. That will typically mean any relevant income tax on it has been levied.
Putting money into a SIPP that has been subject to income tax ordinarily attracts tax relief. Basically the government will top it up with “free money“. That does not happen with an ISA.
But a Stocks and Shares ISA lets an ordinary rate taxpayer withdraw any capital gains, dividends, or capital at any time, without being taxed.
By contrast, the SIPP drawdown rules are less flexible.
Twenty-five percent of a SIPP’s value can typically be withdrawn tax-free from age 55. The remaining cash cannot simply be taken out tax-free like it could from a Stocks and Shares ISA.
How I’m approaching this
One share I own in my Stocks and Shares ISA instead of my SIPP is Topps Tiles (LSE: TPT).
I am hoping for long-term price gain from Topps. In recent years alas it has been a dog, falling 48% in five years.
Topps’ share price fall reflects tough trading conditions and an uncertain outlook for the housing market.
The chain accounts for one in five tiles sold in Britain. So over the long run I think its prospects remain bright.
It has grown partly by buying up assets in a consolidating market, increasing its economies of scale.
The current yield is a beefy 8.3%.
As I own Topps in my Stocks and Shares ISA, I can take those dividends out tax-free if and when I choose. I do not have to wait until I am a certain age.
