Stocks & Shares ISA vs SIPP – Which Is Right for You?
The wide variety of types of saving account around means that there is something that is right for everyone. Yet, this extensive range of options can also end up being confusing if you just can’t work out which one to go with.
This is often the case when investors compare Stocks & Shares ISA accounts with Self-Invested Personal Pensions (SIPPs). The good news is that there are some differences between these two that help to make it an easier decision for you.
The Tax Benefits
Most people are already aware that both of these types of saving account offer attractive tax benefits. Indeed, this is one of the most powerful reasons for choosing either an ISA or SIPP investment in the first place.
What not everyone is aware of, though, is that the tax benefits are set up differently for these accounts.
For instance, in the case of SIPPs, you get tax relief on the money you pay in via a government top-up of between 20% and 45%, depending upon your earnings and circumstances. On the negative side, you may need to pay tax when you take the money out of this account if withdrawing more than 25% of the pot. You can find out more about the tax benefits of a SIPP on this page.
When it comes to Stocks & Shares ISAs, there is no top-up paid by the government when you pay in, but you don’t need to pay tax when taking the money out either.
In most cases, SIPPs work out to be more tax-efficient for savers. This is especially true for those people who pay higher-rate tax while working but expect to move down to paying basic-rate tax when they take out the money, as they’ll get a larger top-up when paying in but then pay less in tax when they withdraw the money during retirement.
If you are a complete newcomer to SIPPs, then you may find it useful to have a read through this Free SIPP Guide before signing up for one.
The Growth Possibilities
In both of these types of account, the rate at which your money grows will largely come down to what it is invested in. If you are planning to invest your money rather than leaving it sat in a Cash ISA, then both Stocks & Shares ISAs and SIPPs can allow you to make your own investment decisions, although you can also hand over as much control of the day to day handling of the investments as you want to.
One issue to bear in mind is that the top-up for the SIPP mentioned previously gives you more money to start with and try and grow over the years. If you get a good growth rate then the extra money that you started with could go on to become a very handy sum.
There is also the fact that SIPPs often have higher charges and fees attached to them than ISAs. This is due to them needing more work carried out but the difference shouldn’t be enough to sway your decision on its own. You can find out more about SIPP charges here.
If you want to pick your own investments through a Stocks & Shares ISA, then you will need to make sure that you choose an account which allows self-trading. One award winning Stocks & Shares ISA which allows you to pick your own shares is the Do-it-yourself ISA from Hargreaves Lansdown. If you want to take a truly hands off approach then you might want to try a Stocks & Shares ISA with a robo-advisor firm like Nutmeg.
Another difference to be aware of is in the amount that can be paid in to these types of account each year. At the time of writing, you can pay up to £15,240 into all your ISA accounts during the 2016/2017 tax year, regardless of how much you earn.
If you invest in a SIPP, then you can invest as much as you earn each year up to a limit of £40,000 during the 2016/17 tax year. There is also a lifetime allowance of £1 million to take into account.
Those high earners with a salary of over £150,000 need to take a few minutes to work out exactly how much they can invest each year in a SIPP.
When and How to Access Your Savings
One of the essential differences between ISAs and SIPPs is that the former is designed to be accessed pretty much whenever it is needed. You still won’t be taxed if you take the cash out at short notice but you may be charged a small fee, according to the terms of your ISA provider.
SIPPs are set up to only be withdrawn once you reach the age of 55 of after, although withdrawals of over 25% of the pot are going to be subject to tax at your marginal rate when you access it. It’s also worth remembering that the age at which you can access your SIPP funds may rise in the future.
This means that probably the main point to consider in this respect is whether you might need the money in the short-term or not. Are you saving for your retirement years or are you saving for something like a new car, home deposit or your child’s university fees?
By considering your short-term and long-term plans you can make a smart and informed decision in this respect.
Invest in Both Ways?
Of course, it is possible that you will look to get the best of both worlds by investing in both an ISA and a SIPP. There is nothing to stop you doing this if you like.
If you decide to go ahead and invest in both ways then you will want to be sure that you don’t over-stretch your finances by investing more than you can realistically afford to put away. Ideally, you would look to use the best SIPP for your retirement savings and then use your ISA for a shorter-term goal such as buying a car, a house deposit or saving for a child’s university fees.
There are definitely strong reasons for choosing an ISA account, just as there are for picking a SIPP.
If you can realistically afford to save in both of these ways then it could certainly make sense to do so. By doing this you can get the best of both worlds and invest in the smartest and most tax-efficient way possible.
If you are only going to invest in either a Stocks and Shares ISA or a SIPP then it basically comes down to what your short-term and long-term goals are. By considering your future plans and choosing the perfect type of investment then you have far more chance of making your dreams come true.