DIY Investor Considers the Relative Merits of SIPPs and ISAs When Saving for Retirement – by Christian Leeming

Individual savings accounts (ISAs) and self-invested personal pensions (SIPPs) are both tax-efficient wrappers that can be used to save money for retirement and this article explains some of the key features of each.

ISAs are useful wrappers that can either be used as a general savings vehicle or in retirement planning with the benefit that money can be accessed at any time; SIPPs are similarly attractive to UK tax payers, but the money in your plan cannot be accessed until your 55th birthday.

Both SIPPs and ISAs offer a wider choice of investments and greater flexibility than an average pension, giving investors the opportunity to achieve better returns if they make the right choices. However, there are some important differences between the two vehicles, which are set out below.

Tax reliefs

Ordinarily income tax is payable on income from your investments, and capital gains tax is due on any growth in the value of those assets. Both ISAs and SIPPs allow you to protect your savings and investments from these taxes.

SIPPs come with the additional benefit of a tax top-up on cash subscriptions, at the rate of 20 per cent, or 40 per cent for a higher-rate taxpayer.

Thus, £800 saved into a SIPP is generously topped up by the government to £1,000 (essentially giving you back the 20 per cent tax you would have paid on the £1,000).

Higher-rate taxpayers can claim back an additional £200 through a self-assessment form.

ISAs don’t give you this benefit, but they do have one tax advantage over SIPPs. You don’t have to pay tax on money you withdraw from your ISA, whereas the taxman treats income that comes out of a SIPP in the same way as any other income, except for a tax-free lump sum of up to 25 per cent of your entire SIPP pot that you can claim at age 55.

It’s likely that for most investors, SIPPs will work out as more tax-efficient, especially for higher-rate taxpayers, with the caveat that access to these benefits may not be immediate.


The highest yielding Cash ISAs currently available will give you an interest rate of around 2 per cent (fixed rate or two years with access), whereas the return from a self-select stocks and shares ISA will obviously depend on the success of the investment strategy employed.

The return from a SIPP will equally depend on your investment decisions, but with the kicker of a 20 per cent tax top-up; every £800 you pay in will automatically turn into £1,000, which you could see as an instant 25 per cent return. Virtually no investor will make a gain like that from stock picking.


Far more can be paid into SIPPs than an ISAs. The annual ISA allowance for 2022/23 is £20,000 which can be split between Cash and Stocks and Shares products as the investor chooses, with the flexibility to switch between products.

In a SIPP, the general rule is that if you’re a UK resident under the age of 75, you can contribute to all your pensions as much as you earn and receive tax relief each tax year up to the annual subscription limit of £40,000 a year.

Any additional contributions are taxed as income.

The lifetime allowance (£1,073,100 in 2022) is the total value you can hold in pensions without incurring an additional tax charge.

This is measured whenever you take benefits, reach age 75 or die, whichever is soonest.

Even if you’re not a taxpayer, you can put in a maximum of £2,880 a year and still get the tax top-up of 20 per cent, giving you £3,600 gross – £720 ‘free money’ to children or non-earning spouses


ISAs can be used as an emergency fund, with savings not locked away for the long term and not taxed as they’re withdrawn. SIPPs cannot be accessed until you turn 55, although this can be an advantage if you don’t trust yourself to leave the money alone until you retire.

ISAs are considered a flexible and portable alternative for retirement planning, whereas SIPPs trade off lack of instant access against greater tax efficiency.

A Balancing Act

Broadly, SIPPs are more tax-efficient but ISAs provide instant access and portability.

However, in practice, ISAs and SIPPs are not mutually exclusive. A mixture of saving through SIPPs and ISAs will be most appealing to the majority of investors, and this should enable you to manage both medium-term and long-term savings.

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