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SIPP vs ISA

How to invest tax-efficiently.

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.

Saving and investing tax-efficiently can help you make the most of your money.

Both SIPPs and ISAs let you shelter your money from tax and offer some of the most generous tax saving perks available. But choosing the right account will depend on your future goals.

It’s important to understand the ins and outs before deciding whether to invest.

This 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.

SIPP (Self-Invested Personal Pension)

A SIPP is a great way of saving for retirement while minimising the tax you pay. You can also pick your own investments to match your goals and values and make flexible contributions to suit your circumstances.

SIPPs offer the same great tax benefits as other pensions. For anything you pay in, the government adds a 20% boost in tax relief - even if you don’t pay tax. If you pay higher or additional rate tax, you can claim up to an extra 20% to 25% through your tax return (up to 26% if you’re a Scottish taxpayer).

Any money in a pension also has the chance to grow free from UK income and capital gains tax. Each tax year you can usually shelter up to £40,000. To receive tax relief on your personal contributions you can’t pay in more than you earn. If you’re a non-earner or you earn less than £3,600, you can pay in up to £3,600 (including tax relief).

Money in a pension is meant for your retirement, so you can’t usually take money out again until you reach 55 (rising to 57 from 2028). At this point you can typically take up to 25% tax-free cash, and any other payments will be taxed as income.

If you’re saving for a shorter-term goal, like your first home, you might want to consider a more flexible tax-efficient account alongside your pension.

More on the HL SIPP

Stocks and Shares ISA

A Stocks and Shares ISA is another tax-efficient way to invest and potentially grow your money.

There’s no UK tax to pay on capital gains or income. You can pay in up to £20,000 in total across all your ISAs each tax year. This type of investment account is more flexible. It’s a great option for those looking to save and invest for the future tax-efficiently, while being able to make withdrawals, tax free, whenever you like.

Be aware though, if you take money out of a non-flexible ISA it will lose its ISA status, and putting it back in will count as a new payment using up (part of) your annual limit of £20,000.

More on the HL Stocks and Shares ISA

Lifetime ISA (LISA)

If you’re between 18 and 39 and saving for your first home, or retirement, you may want to consider a LISA.

Like a Stocks and Shares ISA, there’s no UK tax to pay on capital gains or income. Up until your 50th birthday, you’ll also get a 25% bonus added by the government on anything you pay in, up to the annual allowance.

The annual allowance for a LISA is £4,000 – meaning you could receive a £1,000 bonus each year. The 25% bonus makes it an attractive opportunity to consider if you’re happy with the risks of investing in the stock market and it fits your needs.

The Lifetime ISA is less flexible than other ISAs. If you take money out before you’re 60 or for anything other than buying your first home, there’s usually a tax charge. Currently this is 20%, but on 6 April 2021 it’s set to go back up to 25%, so you could get back less than you put in.

You might consider using a LISA to help towards your retirement savings, especially if you’re self-employed and a basic-rate taxpayer.

More on the HL LISA

The best of both accounts

Both SIPPs and ISAs have advantages, and lots of people take the benefits of both. We don’t think it’s a case of choosing one over the other.

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

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.

Tax year ends 5 April

You have until 5 April to make the most of any 2020/21 SIPP or ISA allowances. Once the deadline has passed, these allowances will be lost.

Compare accounts

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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