Saving for retirement? You want to make your money work for you long-term. You’ll also want to be making the most of your tax allowances year-on-year. So, which is better for you: an ISA or a SIPP?
For long-term savers, you’ll be looking for the account which will give you the best long-term returns on your money to save for your retirement.
The best choice for you could be an ISA, or an SIPP – or even both, if you have the cash.
To make it easy for you to make an informed choice, we’ve broken down what each of these accounts offer, so you can judge which of these might suit you and your retirement savings.
What’s an ISA?
An ISA is an individual savings account – which allows you to put your money in a tax-free wrapper. There are various different kinds of ISAs which might suit different needs and stages of life. When it comes to retirement savings, you’ll want to be looking at Lifetime ISAs and Stocks and Shares ISAs.
What’s a Lifetime ISA?
A Lifetime ISA (LISA) is a specific form of ISA which is designed to help people save for life events such as buying your first home and retirement. These are available for UK citizens aged between 18-40. There are options within the LISA umbrella, so you can have Stocks and Shares LISAs or Cash LISAs.
You can pay £4000 into a lifetime ISA each year, which the government will pay you a 25% bonus on – which means you have the potential to earn £1000 tax-free in a bonus from the government each year.
This 25% bonus will continue until you are 50.
The £4000 limit counts towards your overall ISA allowance for a tax year – so if you use the whole of your Lifetime ISA allowance, you’ll have £16,000 allowance remaining for other ISA accounts.
Can I access my money?
Yes, but only once you turn 60. At this point you can withdraw your funds without paying any tax or penalty fees. The only other time you can withdraw these funds is when you are buying your first home. If you want to withdraw the money before you’re 60th birthday for any purpose other than buying your first home, you’ll usually face a 25% charge from the government.
What’s a Stocks and Shares ISA?
A Stocks and Shares ISA (sometimes known as an Investment ISA) does what it says on the tin – it’s an ISA where you can make investments.
This is a way for you to invest in funds via a platform, meaning you can hold many different kinds of investments in one place. These are in a tax-free ‘wrapper’ which means that you do not pay capital gains tax or any taxes on returns (interest, dividends or income) from your investments.
This can make your investments easy to manage, and offers a bit more flexibility than a SIPP.
Can I access my money?
Some Investment ISAs may allow you to take your money out which depends on the platform, so make sure you check this before opening an Investment ISA.
The limit you can put into an ISA account changes each tax year. You can only open one type of each ISA each year, and the current limit you can put into an ISA for tax year 2019/2020 is £20,000.
What’s a SIPP?
This is a Self-Invested Personal Pension; it’s a type of pension where you can make your own personal investment choices.
Similarly to ISAs, the returns you make on a SIPPs are tax-free, and have an annual limit on how much you can put into these.
This is known as an annual pension contribution allowance – for the majority of people this is £40,000 per year.
What about tax?
With these types of pensions, you get a ‘top up’ from the Government (called tax relief) – the amount of which will generally depend on the band of income tax you are in.
If you’re a basic rate taxpayer, you’ll get 20% tax relief on SIPP contributions. For those in the higher-rate taxpayer bands could get a further 20% relief additionally, and for those who are in the additional rate taxpayer band you could reclaim an additional 20%. This makes a SIPP an excellent option for higher-rate tax payers.
One key consideration is the amount of money you can put in every tax year and still receive tax allowance.
You can only contribute the amount of money you earn every tax year. So if you earn £20,000 each tax year then you can only contribute £20,000 in order to receive tax relief. If you contribute more than this (perhaps due to inheritance, bonuses etc.)
Can I access my money in a SIPP?
If you put your funds into a SIPP, your money will be locked away until you are retired. Currently, this means you generally won’t be able to access your money until you are 55 – although those who retire after 2028 will not be able to access their money until they are 57.
Once you’re 55 you’ll be able to withdraw 25% of you pensions savings tax-free, but if you withdraw more than a 25% chunk then this will be subject to income tax.