With the end of the 2025/26 tax year fast approaching, investors are scrambling to make the most of their Self-Invested Personal Pension (SIPP) and ISA allowances before the 5 April deadline.
But when it comes to tax-efficient investing in the stock market, which investment vehicle is the best at building wealth? And if someone invests £5,000 today, how much money could they expect to have in five years’ time?
SIPP vs ISA
Both a SIPP and a Stocks and Shares ISA are powerful investing tools. They both grant immunity from capital gains and dividend taxes. And the SIPP takes things one step further with wonderful tax relief.
But which type of account should investors prioritise? The answer very much depends on what an investor’s objectives are. Someone looking to build tax-free wealth but also needs easy and instant access is likely better served with an ISA. Why? Because money put into a SIPP’s locked away until the age of 55 (or 57 as of 2028).
On the other hand, those building wealth for retirement might be far better served with a SIPP. Even though this only defers taxes rather than avoids them entirely, the initial tax relief can actually make a portfolio grow much faster compared to a Stocks and Shares ISA.
Let’s crunch the numbers.
Investing £5,000 for five years
Let’s say a 52-year-old has just invested £5,000 in a portfolio that will go on to deliver a 10% annualised return. Inside an ISA, that £5,000 compounds into £8,227, which the investor can withdraw at any time and enjoy entirely tax-free.
But if that same portfolio was held inside a SIPP, the outcome’s more exciting. Immediately, the £5,000 is topped up to £6,250 by the UK government through tax relief. And when £6,250 is invested for five years at 10%, it compounds into £10,283.
Assuming the investor has already used up their £12,570 income tax allowance, that means withdrawing this money from their SIPP will trigger taxes. Pension rules allow for 25% to be withdrawn tax-free, with the rest charged at 20%.
The net result: £8,741. That’s £514 more than what a Stocks and Shares ISA would have provided, even with deferred taxes thrown into the mix.
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.
A 10% growth opportunity?
Regardless of whether using an ISA or a SIPP, investors still need to find attractive investment opportunities. And looking at the latest recommendations from institutional investors, it seems that BAE Systems (LSE:BA.) could be worth considering.
The defence contractor’s already on a rampage thanks to a record order book of £83.6bn. With NATO and other European nations ramping up their defence spending in an ever geopolitically complex world, the company has already secured enough contracts to keep it busy for the next several years.
Of course, nothing’s ever risk-free. A rapidly growing order book is only healthy if BAE Systems can keep delivering these on time. If production capacity constraints result in delays, orders may be cancelled or worse, re-assigned to rivals.
It’s a risk that investors will need to consider carefully. But with an impressive track record under its belt, BAE Systems looks well-positioned to thrive in the coming years. That’s why I think this defence stock is worth a closer look. And it’s not the only opportunity to explore today.
