SIPP vs ISA or both?

Self-Invested Personal Pensions (SIPPs) and stocks and shares ISAs (Individual Saving Accounts) are popular investment accounts, and people often ask which is the best one to put their hard-earned money into. It’s all down to which one is best suited for you and your circumstances. Here, we give you an overview of each account. 

Just remember, whether you choose a SIPP or an ISA, the value of investments can go down as well as up, so you could get back less than you put in.

SIPP stands for Self-invested Personal Pension. 

Personal pensions gives you a simple, tax efficient way to invest for retirement, if you don't have access to a workplace pension or are looking to save more. Remember these will benefit from employer contributions. 

What separates SIPPs from standard personal pensions is that they offer more flexibility. They have a wider range of investments for you to choose from, which you can buy and sell whenever you like, and you have a lot of control over how these investments are managed. You can manage them yourself or an expert could do it all for you while you take a back seat. 

An ISA is an Individual Savings Account. A stocks and shares ISA lets you invest your money in, you guessed it, stocks and shares, and other investments such as fund and bond. 

They’re another way to put money away for the future – and the money has the potential to grow more than if it were sitting in a regular cash ISA or savings account. 

Stocks and shares ISAs are a flexible and popular option for investors – both beginners and the more experienced. You don’t have to wait until you’re a certain age to take out the money, and, like SIPPs, you have a wide range of investments to choose from. 

If you open an ISA, you might be saving for a house or a wedding. But really, as long you're willing to invest for 5 years or more, it's up to you what you do with the money. 

The pension annual allowance for the 2024/2025 tax year is £60,000. 

There’s the option to carry over some of your unused allowance. It’s known as pension carry forward. Your unused annual allowances from the previous three tax years can roll over to the current one. But you have to use all your current annual allowance first, then you can carry forward the earliest of the three years’ allowances to the current tax year. 

There’s also a tapered allowance. The tapered annual allowance comes into play if you earn over £260,000 a year. The £60,000 annual allowance gets tapered down for you higher earners by £1 for every £2 you make over £260,000, down to a minimum of £10,000. 

If you have flexibly accessed taxable benefits from a defined contribution (money purchase) pension in the past, your annual allowance for defined contribution pensions, like SIPPs, will be reduced to £10,000.

An ISA also has an annual allowance.

In the 2024/2025 tax year, you can invest up to £20,000 tax-free. But if you don’t use your full allowance in a tax year, it’s gone – you can’t carry it forward like you can with the pension allowance. 

Flexible ISAs allow you to withdraw money and put it back in the same tax year without effecting your annual ISA allowance. 

Similar to other pensions, investments in SIPPs can grow free from Income Tax and Capital Gains Tax. 

Plus, the Government actually tops up what you personally pay in – they’ll add 20% tax relief if you’re a basic-rate taxpayer, so if you pay in £80 to your SIPP the Government will add an additional £20. And, you can claim back another 20% or 25% if you’re a higher or additional-rate taxpayer respectively. If you are a Scottish taxpayer you are able to make a claim at the higher tax rates applicable. 

When the golden years arrive and you’re ready to take your money, you can normally take 25% tax-free too – the rest is taxed at your Income Tax rate.

You don’t pay tax on any profits you make in an ISA and all your investments are free from Capital Gains Tax. You won’t pay Income Tax on any money you withdraw from your ISA either.

Pretty much anyone that is a UK resident that’s under 75 can take out a SIPP. You can even open them for your children to give them a (big) head start on saving for retirement. Although certain providers may not allow under 18s to open one.

Anyone who’s a UK resident over 18 can open a stocks and shares ISA. You can also open a JISA – a Junior Individual Savings Account – for the kids in your life. They work in a similar way as a normal ISA, the allowance is just lower at £9,000. 

Both are great options for putting money away for future-you – it just depends how far in the future that is. If you want to put money away for a car and have access to the money before age 55 (57 in 2028), for example, a stocks and shares ISA is going to be your only choice out of the two because you can withdraw the money whenever you want and for whatever you want. 

With a SIPP, you have to be prepared to leave your money locked up for decades depending on how old you are when you open it – because you can’t touch the money until you’re at least 55 (57 from 2028).

If you're still stumped over whether a SIPP or an ISA is right for you, then you should chat to a professional. A financial adviser can look at your money goals and point you in the right direction. You can find one at Unbiased - there will be a charge for advice. 

It’s also a good idea to make sure you have enough cash savings for any unforeseen emergencies before you consider investing. Your boiler might break down at the same time as your washing machine gives out and your window is smashed by a football… Hey, they say bad things come in threes.

If you’re interested to know how we can help and are ready to invest, you could take a look at the Aviva SIPP or Aviva Stocks & Shares ISA. We’ll help you get started.