The Motley Fool

Forget a cash ISA! A SIPP could help you retire wealthy

A self-invested personal pension (SIPP) may sound like a relatively complicated financial product. However, the reality is that it is now easier than ever to set one up and manage it online, with the cost of doing so being relatively low.

Certainly, a number of individuals may feel as though investing in the FTSE 100 and other shares through a SIPP may be a riskier move than having savings in a cash ISA. While there is a risk of loss with shares, the reality is that over the long run they are much more likely to provide a nest egg large enough to provide a financially-secure retirement.

Return potential

While there are a range of assets which can be held within a SIPP, including commercial property, shares could offer the simplest and most effective means of building-up retirement savings.

Contributions made into a SIPP benefit from favourable tax treatment. This means that for every 80p invested in a SIPP from after-tax earnings, the government will ‘top-up’ the amount with 20p. Over time, this can lead to a much larger nest egg. And with 25% of a SIPP being tax-free upon withdrawal from age 55, even if returns are minimal the product could be worth utilising for the tax benefits alone.

In contrast, the contributions made to a cash ISA are subject to income tax. This means that the amount invested is unlikely to grow as quickly as the contributions made into a SIPP.

Interest rates

When interest rates were relatively high and the interest received in savings accounts was subject to income tax, a cash ISA had some appeal. Generally, the rates offered were an improvement on the after-tax interest rate on savings accounts. Since interest rates were above 5% until the financial crisis, the overall return was relatively strong.

Now, though, low interest rates have meant that receiving much more than 1% from a cash ISA is challenging. This is well behind the current rate of inflation of 2.7%, and means that the real-terms value of contributions into a cash ISA are set to decline year-on-year. Similarly, with the first £1,000 of interest received each year now being tax free, the reality is that a bog-standard savings account may offer a higher return than a cash ISA.

In contrast, shares bought through a SIPP could offer much stronger return potential in the long run. For example, the FTSE 250 has recorded a total return of over 9% per annum in the last 20 years. Although there is no guarantee that this will be repeated in future, in the long run the returns from a diverse range of shares are very likely to beat the return on a cash ISA – even if interest rates rise over the medium term.


While saving money for emergencies is always a good idea, having too much wealth in cash can lead to the erosion of spending power. As such, for individuals seeking to build a nest egg for retirement over the long run, a SIPP could be worth considering.

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