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Should you invest in a SIPP or an ISA?

This is not pension planning advice, although I will be comparing a Self-Invested Personal Pension (SIPP) against an Individual Savings Account (ISA). I am assuming your financial security in retirement is secure, but that you have more to invest and are wondering if an ISA or SIPP is right for you.

Self-Invested Personal Pension

A huge benefit of making contributions to a SIPP is that the taxman tops them up by 20% directly, and if you are a higher rate taxpayer, you can claim an additional 20% through your self-assessment. The table below shows the effective costs to basic and higher rate taxpayers of various contributions, assuming claims are paid in full.

Contribution after top-up

Cost for a basic-rate taxpayer

Cost for a higher-rate taxpayer










As you can see, you stand to gain an impressive return just by funding a SIPP, and your investment will grow free of capital gains or income tax.

The table below shows the value of varying investments in a SIPP made by a basic rate taxpayer, after receiving the top-up and growing at 5% per year, untaxed over time.

Initial contribution to a SIPP
















With the top-up, and sheltered from tax, investments in a SIPP can grow impressively over time. The drawback is that you need to reach the age of 55 before you can take a 25% tax-free lump-sum and start withdrawing additional funds, which are treated as ordinary income. Any income over the current personal allowance of £12,500 gets taxed.

A SIPP account will also be considered alongside a workplace pension when working out annual contribution limits, which are 100% of your salary up to £40,000. There is also a lifetime allowance of £1,055,000 for pension contributions, which is expected to increase with inflation. If you breach these limits then additional taxes are due.

Individual Savings Account

You have a £20,000 annual contribution allowance that you can spread across any ISAs you hold. There are several types of ISAs, but cash (you receive a fixed or variable interest rate) and investment ISAs are the basic types. In the latter, you can hold stocks and shares, funds, and other investment vehicles.

If the ISA is flexible, you can remove and re-deposit funds so long as the total yearly inflow into the fund does not breach the annual allowance.

You do not get any tax relief on contributions, but once inside they can grow tax-free. The table below shows how different amounts grow at 5% per year over time in an ISA.

Initial contribution to an ISA
















As you can see, the ISA underperforms the SIPP. However, there is no age requirement for withdrawals, and any withdrawals are completely free of tax. Cash or investment ISAs are truly tax-exempt, compared to SIPPs which defer taxes. 


If you are going to dip into your investment pot before the age of 55, then an ISA is a clear choice. If you are currently paying the higher rate of tax, the boost you get with the SIPP can’t be ignored, particularly if you are going to be paying the basic rate in retirement.

For most people, the choice is not as clear cut, but generally, an ISA provides more flexibility, while a SIPP saves more tax over time. But with either, always choose quality and diverse investments to hold inside them.

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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.