Which is better: Stocks and Shares ISA or SIPP? Here’s what the experts think
Many UK investors choose to invest through a Stocks and Shares ISA because of the favorable tax benefits. However, it may not be the best option.
Depending on individual needs, a Self-Invested Personal Pension (SIPP) can offer even greater benefits.
So what is the difference and, more importantly, what do the experts think?
The main difference
Essentially, SIPPs are designed with retirement in mind, while ISAs are designed for all types of savings. Investors aiming to save on property or other capital expenditure will benefit from the convenience of an ISA. Those saving only for retirement can opt for a SIPP.
SIPPs offer tax relief on income of up to £60,000 a year and tax-free growth, but access is locked until age 55 (rising to 57 in 2028). In retirement, 25% of the withdrawal is tax-free and the rest is taxable as income.
Stocks and Shares ISAs have an annual dividend of £20,000, tax-free growth, no withdrawal charges and no access restrictions. This makes them better suited for medium-term goals.
Both allow investment in UK shares, funds, ETFs, and bonds, but SIPPs offer wider options such as commercial property.
What do the experts say?
According to analysts at AJ Bell: “The two big differences are how and when you can access your money, and the tax relief bonus of a SIPP.“
SIPP advice says: “In short, a SIPP is better for long-term savings, and an ISA is better for short-term savings..”
But according to some experts, a more effective approach may be to use both options. “This gives you the best of both worlds: immediate tax benefits, long-term growth potential, and ultimate flexibility,” said a Freetrade analyst.
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.
Stocks to consider
Legal & General (LSE: LGEN) stands out as the most profitable budget for UK investors building retirement pots with SIPPs or ISAs to consider. As an FTSE 100 life insurer and asset manager, it benefits from strong income and defensive qualities.
Popular with income investors, its yield usually ranges between 8% and 9%. The payments are supported by stable annuity sales and pension risk transfer deals worth billions a year.
Budget growth of 2%-4% is forecast, with low volatility suitable for middle-aged people looking for income amid economic volatility. At around 267p, it is close to its 52-week high but trades on a forward price-to-earnings (P/E) ratio of just 11 – suggesting a decent value.
Over 20 years, investing £20,000 in L&G can add to the SIPP edge. With an assumed annual return of 8% (a 9% yield and less growth, per forecast), the ISA would grow to around £93,219 tax-free. The SIPP increases the effective investment to £24,000 with 20% tax relief, reaching a net £95,084 after withdrawal taxes (25% tax-free, 75% at 20%).
Although the difference is small, the SIPP still comes out ahead by £1,865.
Final thoughts
The example above shows how investors who don’t need to touch their money until retirement can benefit a bit from a SIPP.
What is ‘best’ depends a lot on individual circumstances. However, in my opinion, the flexibility of the ISA makes it the preferred option. Even if you’re investing for retirement, you never know when you might need cash in an emergency.
But don’t put everything in one stock – a diversified portfolio of stocks is a smart way to reduce risk, even if it lowers the average yield.
