Wrappers Unwrapped 4: SIPPs vs ISAs

8 min read 28 Sep 21

These two major personal-financial planning tax wrappers attract billions in contributions every year. But which should you be using for your client? To help, we compare their rules and features.

Partly because of the growth in online platforms, mixing tax wrappers has never been easier. But when it comes to two of the most popular wrappers – which should you be using for clients?

Overleaf, we’ve compared the features of SIPPs and Stocks & Shares ISAs. Both offer a wide range of investments and allow tax-free growth within the fund. Beyond that, there are important differences.

SIPPs: Tax relief and employer contributions 

The big attraction of pension plans such as SIPPs is the upfront tax relief. This basic rate relief makes the gross contribution to a pension higher, and those that pay tax above the basic rate may obtain a reduction in their tax bill.  Even non-taxpayers can contribute £2,880 and get £720 in tax relief added on each year, up to age 75. 

Tax relief can add a huge boost to the future value of the fund. So for almost any taxpayer maximising the amount that goes into a pension can be advantageous. Additionally, an employer may be willing to match contributions into a pension as a tax-relievable expense (although usually into their own workplace pension rather than the individual’s SIPP). That’s something employers can’t do into an ISA.

ISAs: Flexibility and tax-free proceeds

On the other hand, an ISA can be better for medium-term and flexible savings goals where money needs to be accessed before minimum pension age, such as saving for a mortgage deposit, university fees or a car. Plus all ISA proceeds taken by the owner are tax-free – it’s usually just 25% of a SIPP’s value that is tax free.

In short

The respective benefits of SIPPs vs ISAs will partly depend on the rate of tax a client is paying while they are saving and the rate the pay when they need to start withdrawing funds, which can be hard to predict. There is also a trade-off between flexibility and easy access (ISAs) and discipline and a long-term savings view (SIPPs).

For this reason, a combination of SIPPs and ISAs is often the optimal solution. Using these allowances together can allow a substantial level of funds to be saved tax efficiently – and then withdrawn in a way that best suits a client’s current tax status.

Issues to consider

• Will a client want to access proceeds before age 55 (57 from 2028)?

• Can the client benefit from matched employer contributions into a SIPP or workplace pension?

• Does the client need the savings discipline of a SIPP or the flexibility of an ISA?

• What is likely to be the client’s tax rate when they put money in and when they need to take proceeds out?


Self Invested Personal Pension (SIPP)

Individual Savings Accounts (Stocks & Shares ISAs)

Investment choice: Wide range of securities and investment funds. A SIPP can also directly hold commercial property. 

Investment choice: Wide range of securities and investment funds. An ISA cannot directly hold commercial property.

Maximum tax-relievable annual contribution: Up to 100% of the individual’s relevant earnings (or £3,600 gross if this is higher) can be paid in by an individual or third party on their behalf and receive tax relief (for those aged under 75). Employers can pay in too and this is not limited to earnings. A standard annual allowance1&2 applies of £40,000. If this is exceeded, carry forward can mitigate any annual allowance excess charges that may apply.

Maximum annual contribution: £20,000 – no upper age limit on contributions.

Lifetime allowance (LTA) 3: The standard LTA is £1,073,100 and applies across all pensions except the State Pension.

Lifetime allowance (LTA): No lifetime allowance applies.

Tax treatment of contributions: Tax relief given at the holder’s marginal rate of income tax - i.e. 20%, 40% or 45% (20%, 21%, 41% and 46% for Scotland)

Tax treatment of contributions: No tax relief given on contributions

Internal tax treatment of investment funds: Accumulated fund grows tax free.4

Internal tax treatment of investment funds: Accumulated fund grows tax free.4

Access: Proceeds cannot usually be accessed until age 55 (age 57 from 2028). Heavy penalties may apply for earlier access.

Access: Proceeds can usually be accessed at any time (but ISAs recommended as a medium to long-term investment). ISA providers may impose their own access rules.

Tax treatment of proceeds: Usually 25% of total fund can be taken tax-free. Remainder taxed at individual’s highest marginal rate of income tax at the time of withdrawal, whether taken as drawdown or an annuity.

Tax treatment of proceeds: All income and gains taken free of tax and do not need to be declared to HMRC.

Tax treatment on death: Pensions are not usually subject to IHT on death. Death benefits may be subject to a test against the LTA on death before 75 and if settled within two years will be free of income tax on the recipient. If death benefits are settled after two years or the deceased was over 75 these will be subject to income tax. 5

Tax treatment on death: Spouse/civil partner entitled to additional temporary ISA allowance equal to the value of the deceased’s ISAs at the date of death. If not passed on to a spouse/civil partner, ISAs form part of the deceased’s estate and may be subject to inheritance tax.

1 - High earners may be subject to the tapered annual allowance which could reduce their AA down to a minimum of £4,000 (although carry forward may be able to be used). 2 - Where individuals are subject to the Money Purchase Annual Allowance, the annual limit on contributions made by them or on their behalf to money purchase plans is reduced to £4,000 (and carry forward cannot be used). 3 - The maximum value of all total pension benefits taken before a Lifetime Allowance tax charge will apply. 4 - Foreign dividends may have paid tax in country of origin and may not be reclaimable. 5 - If beneficiary is not an individual (e.g. a trust) benefits are paid as a lump sum taxed at 45%; payments to nominated charities not taxed.

Tax rates and thresholds are for the 2021/22 tax year unless otherwise stated