Investors will be focused on contributing to their ISA allowance before Sunday’s (5 April) deadline, but they shouldn’t forget the SIPP.
The Self-Invested Personal Pension is often overlooked but also offers some stellar tax breaks. Investors can contribute the equivalent of 100% of their income, up to the £60,000 annual allowance. They can even mop up unused annual allowance from the previous three years.
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.
Choosing between the two is a little complex so I decided to call in artificial intelligence (AI), asking ChatGPT which is better, a SIPP or an ISA?
As a rule, I approach ChatGPT with extreme caution. It can be very hit and miss. But I thought it might work for a straightforward technical question like this.
Tax wrapper tactics
The chatbot described ISAs as simple and flexible saying: “Money grows tax-free and savers and investors can dip into it whenever they like. That flexibility is a huge plus”.
SIPPs, it said, come with a big upfront incentive: “The government adds tax relief to contributions. Pay in £80 and it’s instantly topped up to £100. Higher-rate taxpayers can claim even more back. That’s an instant boost”.
However, investors can’t access SIPP savings until at least age 55, rising to 57 from 2028. That makes it a long-term game, the chatbot said: “Fine for retirement, less helpful if you might need the cash sooner”.
One thing ChatGPT failed to state is that pensions are taxed on the way out as income, aside from the 25% tax-free lump sum. ISA withdrawals are free of tax.
Personally, I don’t see this as an either-or decision. ISAs and SIPPs offer complementary tax breaks. It’s worth striking a balance between the two. Someone with a big ISA might divert some funds to a SIPP, for example, and vice versa.
Once an investor’s picked their wrapper, the real challenge begins: choosing what to invest in. And that’s where I stop listening to AI. It can summarise facts, but it can’t judge value or risk, let alone pick stocks and shares.
National Grid shares are solid
One stock I’ve been looking at is National Grid (LSE: NG). It’s viewed as a steady FTSE 100 income play, thanks to its regulated business model and near-monopoly position in energy transmission.
It hasn’t been immune to recent volatility, but it’s held up better than most. Over the longer term, performance has been solid, the shares up 25% over one year and more than 50% over five, plus a reliable stream of dividends.
There are challenges. The group plans to spend at least £60bn upgrading grid infrastructure, and big UK projects have a habit of running over budget. The £7bn rights issue in 2024 also spooked investors, but they piled in when they saw the attractive terms.
However, National Grid remains a key part of the UK’s energy system. It’s even upgraded its growth outlook, guiding for solid earnings increases.
The valuation isn’t as cheap as it was with a price-to-earnings ratio of just over 22, and the yield’s come down to 3.7%. But for steady, long-term income, I still think it’s worth considering. Whether that’s in an ISA or a SIPP. But there are other FTSE 100 income and growth stocks I’ll buy first.
