I asked ChatGPT whether it is better to generate income from UK shares through an ISA or a SIPP and he said…
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Passive income is a major goal for many investors, and investing in a tax plan can speed up the journey. Britain has two great options, the Stocks and Shares ISA and the Self-Invested Personal Pension, better known as a SIPP. Both are tax-sheltered shares, but in slightly different ways. So which works best for money hungry investors?
I would never rely on artificial intelligence to make a sharing choice, but I wondered if AI could help solve a technical question like this. So I asked ChatGPT.
Two ways to save profits
The chatbot told me that a SIPP offers immediate tax relief on contributions, which gives income investors a head start. A basic rate taxpayer who invests £8,000 gets that up to £10,000, while higher rate taxpayers can get a further £2,000 on their self-assessment tax return. That bigger pot buys more stock from day one, which means more profits.
However, the pension is closed until at least 55 years old, rising to 57 in 2028. And while 25% can usually be taken tax-free, the rest is taxed on withdrawals. For anyone hoping to live on benefits before retirement, that limit is important.
ISAs turn that tax figure upside down. There is no advance promotion, but all benefits and benefits are tax-free for life and can be withdrawn whenever needed.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
IM&G is a high yield star
One UK dividend stock that I am very happy to hold FTSE 100 treasure manager IM&G plc (LSE: MNG). I bought it in 2023, mainly for income, when the yield was close to 10%. Shares are up 47% over the past year, giving me a nice chunk of growth. Unfortunately for new investors, that lowered today’s trailing yield to 6.5%. It’s still attractive though.
The board has been gradually increasing dividends but the pace of growth should slow down to just 2% per year. At least the payments should continue, as M&G boasts a solid Solvency II ratio of 234%.
Stocks have had a strong performance and could move slowly from here, especially if we experience a burst of market volatility. A crash would affect asset prices and could take a huge toll, although M&G has a decent cushion. Last month, the board warned of a single cut of £230m in Solvency II Funds linked to the government’s proposed tax rate. That is a blow, but by no means a disaster.
Even if the yield isn’t as good as it used to be, M&G shares still look worth considering for long-term income investors. So what about that ISA/SIPP question?
ChatGPT has not announced any winners. It said that while a SIPP brings that significant improvement up front, holding high-yielding shares within an ISA has the huge advantage of keeping every penny of income tax-free. I would argue that this makes life a lot easier for those who do withdrawals regularly, year after year.
A combination of the two is probably right, because the tax breaks are consistent, but there is an argument for putting multiple income earners into an ISA. As with everything related to investing, it’s a personal decision, and chatbots can only provide synthetic feedback.
