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ISAs v SIPPs – do you need both?

What are the differences, and could they be right for you?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

If you want to make the most of your money, saving tax efficiently is important. ISAs and SIPPs offer some of the best tax saving perks.

Understanding the main benefits and risks could help you decide if they are right for you – it even could be both.

Remember this article isn’t personal advice. Tax rules can change and any benefits will depend on your circumstances. Any investments you hold in an ISA or a SIPP can go up and down in value. So it’s possible to get back less than you put in. If you are unsure if they are right for you seek advice.

Stocks and Shares ISA

A Stocks and Shares ISA is a ‘wrapper’ that allows you to choose and hold different types of investments all in one place. It’s a great option for those looking to invest for the future, with the flexibility to easily take money out when you want to.

There’s no UK tax to pay on capital gains (profits made from selling investments) or on any income your investments make, like dividends or interest.

You can pay in up to £20,000 to an ISA this tax year (2019/20).

Remember, if you take money out of an ISA it will lose its tax-free status, so putting it back in again will normally count as a new subscription.


Lifetime ISA (LISA)

If you’re over 18 and under 40, and saving for your first home you might want to think about a Lifetime ISA (LISA).

This type of ISA works in a similar way to a Stocks and Shares ISA but you can only pay in up to £4,000 a year (which counts towards your overall ISA limit).

The real advantage is that the government will add an extra 25% on top of anything you pay in – so you could get a chunky £1,000 of free cash a year. You can add money to the LISA and receive the government top-up up until you hit 50.

LISAs can also be a great way to invest for later life. Once you turn 60 you can take the money out without paying any tax or penalties.

But what’s the catch?

You have to wait at least 1 year before you can take the money out to buy your first home (worth up to £450,000). And if you want to withdraw before you’re 60 and use it for anything other than buying your first home, there’s normally a 25% government withdrawal charge. So you could get back less than you put in.

Remember savings outside a pension could affect your entitlement to state benefits. And if your employer makes pension contributions when you do too, you should always consider this first.

More on the HL LISA

Self-Invested Personal Pension (SIPP)

A SIPP is basically what it says on the tin. It’s a type of pension that lets you make your own investment decisions.

Any capital gains and income from SIPP investments are free of UK tax and anything you pay in will count towards your overall annual pension contribution allowance (for most people this is £40,000 each tax year).

You also get a top-up from the government – called tax relief.

The tax relief offered on personal contributions to a pension will depend on your income tax rate. Basic-rate taxpayers will get 20% tax relief on SIPP contributions. Higher-rate and additional-rate taxpayers can potentially reclaim up to another 20% and 25% respectively. And even if you don’t pay tax you can still get up to 20% tax relief. Income tax rates and bands are different for Scottish taxpayers.

Remember, to receive tax relief on your personal contributions, you can only contribute as much as you earn each tax year, or £3,600, whichever is greater. For example, if your salary in the current tax year is £30,000, this is the most you can add across all your pensions and receive tax relief.

More on tax relief

If you pay money into a SIPP, you’ll be locking your money away until retirement. You can’t usually take money out until you’re 55 (57 from 2028). But once you hit 55, you can usually take out up to 25% of your pension pot tax-free, with the rest subject to income tax.

A SIPP is a great way of saving for retirement while minimising the tax you pay. It can help you maximise your savings, especially for those on higher incomes.

More on the HL SIPP

The best of both worlds?

Both SIPPs and ISAs have their perks, and lots of HL clients enjoy the benefits of both. We don’t think it’s a case of one or the other.

You might want to use your SIPP to invest for longer-term goals like your retirement, and your ISA for medium-term goals.

It’s important to think about your own objectives and attitude to risk when deciding what’s right for you. The benefits of each account will depend on your personal circumstances and both these products carry risks.

Investments should be made for at least 5 years, and their value will fall as well as rise so you could get back less than you invest. This article isn’t personal advice. If you’re not sure what to do you can always ask us for advice.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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