On the surface, Stocks and Shares ISAs and SIPPs can look very similar as they both allow you to save for the future in a tax-friendly way — but there are a few differences worth knowing.
Here’s a short guide to help you understand the main differences between Stocks and Shares ISAs and SIPPs, so you can make the right choice for you, your affordability, and your financial future.
What is a Stocks and Shares ISA?
Benefits of Stocks and Shares ISA vs SIPP
Differences between a Stocks and Shares ISA vs SIPP
How to set up a Wealthify Stocks and Shares ISA or SIPP
What is a SIPP?
A Self-Invested Personal Pension (or SIPP for short) is a type of personal pension pot that gives you control and flexibility over your retirement fund.
Unlike a workplace pension where you have to contribute at least 3% of your earnings (depending on your employer’s policy), with a SIPP, you can decide how much you want to pay in. And once you’ve made a deposit, your money will typically be invested into a range of investments.
Each provider you research will invest your money in their own differently defined style. With Wealthify, for example, you’d choose between an Original or Ethical Investment option and complete a suitability quiz to measure your investment style (ranging from our Cautious to Adventurous Plans). Then, our in-house Investment Team will use their expertise to create and manage an Investment Plan for you, always keeping your values and investment preferences in mind.
With investing, your capital is at risk.
What is a Stocks and Shares ISA?
If you live in the UK and are currently investing, you may be required to pay tax on any gains you make. However, it is possible to invest in a tax-free way.
Since they were launched in 1999, every adult in the UK has been able to invest tax-efficiently by using an ISA. While there are four types of ISAs available to you, we’ll focus on the Stocks and Shares ISA for the remainder of this article.
Sometimes called ‘Investment ISAs’, the Stocks and Shares ISA allows you to invest up to £20,000* per tax year, while ensuring your returns are completely tax-free. Your money will typically be invested in a large range of assets, such as shares and bonds, and you won’t need to pay income tax or capital gains tax, meaning you’ll get to keep more of your money.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
Benefits of Stocks and Shares ISA vs SIPP
* Note: the £20,000 ISA allowance is correct as of the 2024/25 tax year but could be subject to change in the future.
Stocks and Shares ISA vs SIPP considerations
- If you’re looking to take advantage of a pension’s tax benefits, consider staying within the limits of the tax relief allowance.
- SIPPs are age-restricted (it’s a retirement fund for yourself, after all), and it’s possible that this age limit could keep rising in the future. While there may be exceptions to withdrawing early due to ill health, it’s key to consider any hefty tax charges you may face if you need to withdraw earlier than retirement age.
- The SIPP provider fees may be high, and this could have a substantial impact on your total funds, especially if the pension pot has built up to a large total sum as you near retirement age.
To help you compare providers, Wealthify, for example, has an annual management fee of just 0.6% — lowering to a 0.3% fee for any portion of a pension that’s £100,000 or above. Investment costs (including fund charges) also apply. You can read more about our fees here.
Further Stocks and Shares ISA considerations
- Capped at a £20,000 ISA allowance per tax year — this amount must be spread across any ISAs you have and are paying into during the current tax year. You are responsible for keeping track of this and not investing/saving more than that.
- It’s better to transfer an ISA, rather than withdraw and deposit into a new ISA, as the latter could affect your current tax year’s £20,000 allowance. For more information, please read our ISA transfer guide.
Similarly to the SIPP consideration, the ISA provider fees may be high. (Although with Wealthify, our annual fee for our Stocks and Shares ISA is just 0.6%.)
SIPP vs Stocks and Shares ISA: what are the differences?
As they are two very different financial products, it’s sensible to approach them with their limitations and capabilities in mind; from there,work backwards to determine which is considered right for you:
Contributions to ISAs and SIPPs
ISAs and SIPPs are two great tax-efficient ways to invest; however, the amount you can put in each type has some tax considerations to be aware of.
In the current tax year, you can put up to £20,000 in a Stocks and Shares ISA. The way you use your ISA allowance is up to you; you could either invest it all in a Stocks and Shares ISA, or you could split it between a number of ISA accounts. You could, for example, put £11,000 in a Stocks and Shares ISA, £5,000 in a Cash ISA, and £4,000 in a Lifetime ISA.
Every tax year, you have until 11.59pm on 5th April to make the most of your annual ISA allowance, otherwise you’ll lose that tax-free allowance amount forever. You can’t carry any remaining allowance over to the new tax year, but instead it resets to a fresh £20,000 allowance.
With a SIPP, the rules are a bit different. Each tax year, you can invest as much as you want. However, the amount you get tax relief on is typically limited to £60,000, or 100% of your earnings (whichever is lower); this pension allowance is the combined contributions made by you, your employer (if applicable), and the government.
For instance, if you earn £80,000 a year and decide to put the full amount in your SIPP, you’ll only get tax relief on £60,000 (and may pay tax on the rest). If you haven’t used your full allowance from the three previous years, you may be able to carry it forward and use it in the current tax year. All you need to do is make sure you have earnings that are at least equal to the total amount you are contributing, and you must have been a member of a registered pension scheme.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
Tax relief with ISAs and SIPPs
Whether you invest your money in an ISA or a SIPP, you get to protect your investments from income tax and capital gains tax. However, these tax-free benefits will vary depending on the account type you’re using.
With an ISA, you don’t need to pay tax on money you withdraw.
If you have a SIPP, on the other hand, it’s quite different. You get tax relief on the money you put in, and later down the line, you’ll have the option to take up to 25% of your pension money as tax-free lump sums or regular income (drawdown). But the remaining 75% of your withdrawals would be treated like any other income and subject to tax.
Accessing your money in an ISA and a SIPP
If you’re paying into a Stocks and Shares ISA, you have the choice to withdraw money at any time. However, investing should be approached with a long-term view. Unless you really need the money, it’s typically a good idea to keep your money invested for 5-10 years at a minimum, as withdrawing from your Stocks and Shares ISA early could potentially harm your investment journey and you might be missing out on potential growth.
On the other hand, money held in a SIPP can’t be accessed until you turn 55 (and, as mentioned earlier in the article, the retirement age is rising to 57 in 2028, with the possibility of further rises in the future). So, before you invest in a SIPP, make sure you’re comfortable leaving your money alone until you retire. If you do go for this option though, you’re able to withdraw as lump sums, sell some for an annuity plan, or ‘pay yourself’ with it as a steady income.
SIPP vs ISA: which one is right for you?
This answer is entirely down to you, but a helpful way to come to your decision is to:
- weigh up what your long-term goals are;
- and whether you intend to achieve them before retirement age.
While both have great tax-efficient benefits, you could withdraw your investments in a Stocks and Shares ISA before your retirement date — without worrying about paying any income tax.
Whereas, with a SIPP, you’d need to wait until retirement age and you’d only have the first 25% that you withdraw as a tax-free lump sum.
Can I have a SIPP and an ISA?
Absolutely! In fact, you could have multiple of each type to meet your different financial goals. However, many people consider compounding to be a strong advantage to their wealth building.
So, for example, it may be worth combining some of your past pensions into one pot to let it continue to build wealth as one consolidated amount — however, it’s best to compare the fees and charges of your pots before you do this, as combining pensions doesn’t always guarantee more money for retirement and investment performance can’t be guaranteed.
Similarly, you could choose to have only one or two ISAs on the go, to help you keep track of your annual deposits (remembering that you’re responsible for staying within your £20,000 allowance each year).
Can I transfer my pension to an ISA?
Although it may be technically possible to do so, transferring or withdrawing from a SIPP or ISA – and moving the funds into the other type – is not typically encouraged or advised. If you’re considering a move like this, seek some independent financial advice first.
If you moved your money out of your SIPP before your retirement age, you could face high tax implications. And if you’re already at retirement age and opted to withdraw your 25% tax-free amount as a lump sum, you’d be left with needing to pay tax on the remaining 75% of your pension balance. Before you make a decision like this, sit down with an expert who can offer you independent financial advice to chat through all the implications involved.
That said, this isn’t to say you can’t open one of each separately and invest for your goals independently!
How to set up a Wealthify Stocks and Shares ISA or a SIPP
If you’ve done your research and you’re interested in opening a SIPP or Stocks and Shares ISA with Wealthify, it couldn’t be simpler. Become an investor in just a few taps; whether you decide to open a Stocks and Shares ISA or a Self-Invested Personal Pension, getting started is straightforward.
Pensions start at a minimum deposit of £50, while the Stocks and Shares ISA can be opened for £1. All you need to do is choose how much to invest and answer a quiz to determine the investment style that suits you. We’ll then do the hard work for you, from building your Investment Plan to adjusting it when needed to keep it on track.
With Wealthify, you’re in complete control, as you can check how your investments are performing 24/7 via any digital device. And, if you want to do your part for the environment and society, you’ll have the possibility to make your ISA and SIPP sustainable, just by switching our Ethical Investing Plan toggle ‘on’.
Additionally, if you can easily transfer your existing past pensions into a new SIPP, or transfer an existing ISA into a Stocks and Shares ISA (as long as it isn’t a Lifetime ISA, as these have slightly different rules).
If you have any questions about Stocks and Shares ISAs or our Wealthify Pensions, don’t hesitate to get in touch with us.
Want to know how much money you could have when you retire? Our pension calculator can help give you a good idea of what your yearly or monthly income could be. Why not have a play with the figures to see how much of an impact little changes can make?
The tax treatment depends on your individual circumstances and maybe subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
References:
https://www.gov.uk/tax-on-your-private-pension
