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ISAs and SIPPs: what is the difference? And which should you invest your money in?

Find out the key differences between Stocks and Shares ISAs and SIPPs.
ISAs and SIPPs: what is the difference? And which should you invest your money in?
Reading time: 5 mins

If you’re looking to make the most of your money, investing tax-efficiently in an ISA (Individual Savings Account) or a SIPP (Self-Invested Personal Pension) could help. 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 your financial future.


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 income you earn and gains you make. However, there are ways to remove tax from the equation. Since 1999, it’s possible to invest tax-efficiently using an ISA. If you open a Stocks and Shares ISA (also known as Investment ISA), your money will typically be invested in a large range of investments, 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.


What is a SIPP?
A SIPP is a type of personal pension that gives you control and flexibility over your retirement pot. Unlike workplace pensions where you’ve got to contribute at least 5% of your earnings, with a SIPP, you can decide how much you want to pay in, and with Wealthify, your money will typically be invested in a large range of investments. And that’s not all. If you choose to invest in a SIPP, you’ll receive a little gift from the government. What is it, you ask? Well, for every pension contribution you make, you’ll get a 25% top up. In other words, if you want to make a £100 investment, you’ll only need to pay £80 in your account, and the government will add £20 to your pot. Over the long-term, this little help from the government could help boost your pension pot and potential returns.


What are the key differences between Stocks and Shares ISAs and SIPPs?

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 of account is limited. 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. Also, every year, you’ve got until midnight the 5th April to make the most of your annual ISA allowance, otherwise you’ll lose it forever. With a SIPP, the rules are a bit different. Each tax-year, you can invest as much as you want, the amount you get tax relief on is limited to £40,000, or 100% of your earnings (whichever is lower) – this pension allowance is the combined contributions made by you and the government. For instance, if you earn £60,000 a year, and decide to put the full amount in your SIPP, you’ll only get tax relief on £40,000 and you 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.

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, tax reliefs 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, it’s very different. You get tax relief on the money you put in and you have the option to take up to 25% of your pension money as a tax-free lump sum. Extra withdrawals will 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 possibility 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 a number of years. Withdrawing from your Stocks and Shares ISA could potentially harm your investment journey and you might be missing out on positive growth. With a SIPP, your money cannot be accessed until you turn 55, so before you invest in a SIPP, make sure you’re comfortable leaving your money alone until you retire.


Getting started with an ISA and a SIPP?
Investing in an ISA or a SIPP is easier than you might think. We live in exciting digital times where you can become an investor with just a few taps thanks to online investing services, like Wealthify. Whether you decide to open a Stocks and Shares ISA or a Wealthify Pension, getting started is straightforward. All you need to do is choose how much to invest and the risk level that suits you. We’ll do the hard work for you, from building your Investment Plan to adjusting it when needed to keep it on track. But it doesn’t stop there. With Wealthify, you’re in complete control as you can check how your investments are performing 24/7 via any digital device. Also, 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 toggle ‘on’.

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? Try it here: wealthify.com/pension-calculator  

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.


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