Both an ISA and a SIPP are tax efficient wrappers, or accounts whereby generous tax breaks allow you to engage in long term savings or investments in order to provide for your future.
However, both these accounts work in very different ways, one offering tax breaks on the money deposited, and the other offering tax breaks when you take the money out of the account. But if you are putting money aside for your retirement, which of these offers more value in the long run?
One aspect to consider is the allowances on each of these accounts. If you are a person who enjoys big saving power, then you may be better off with both these accounts. However, if like the majority of the country you have limited resources and want to save into one or the other account then you may want to consider which of these will offer you the best tax breaks in the long term.
Whilst neither vehicle is subject to income or capital gains tax on any funds held within the wrapper there are other tax considerations. Contributions paid into a SIPP (Self-Invested Personal Pension) come free of income tax, however, when the time comes to draw your pension, only the first 25% of your SIPP savings come free of tax, the rest will be subject to income tax as you withdraw it.
Conversely, an ISA works in the opposite way, whilst there are no tax reliefs on the money you pay into your ISA, you are free to withdraw your money at any time free of tax.
This means that with the 25% tax free draw down offered on the SIPP, it is the more tax efficient vehicle, offering tax reliefs on money being deposited and tax relief on a quarter of what you withdraw. It is also worth considering the likely possibility that you will be subject to a lower rate of income tax in your retirement then you pay now.
Peter Field is a financial analyst and has written for InvestingReviews.co.uk covering topics from pensions, savings, investments and ISAs. His knowledge of the Investment market has proven invaluable, making his unbiased views and opinions open and honest for everyone. In 2021 Peter retired and is working towards enjoying more of the outdoors with his beloved labrador Millie.