Benefits of saving into a SIPP vs ISA

06 June 2025

Are you looking for the best way to plan for your financial future?

Among the many options you have today as an investor building wealth towards your goals, two popular tax-efficient investment vehicles stand out: Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPs).

Both offer valuable tax advantages and can play crucial roles in managing your wealth effectively. That being said, they serve different purposes and come with distinct benefits, which begs the question: Should I invest in a SIPP or ISA?

SIPPs are specifically designed for controlling how your pension funds are invested to maximise your wealth for retirement, with tax relief on contributions. On the other hand, ISAs provide a flexible tax wrapper that allows your savings to grow and be withdrawn free from Income Tax and Capital Gains Tax (CGT).

Knowing whether to choose a SIPP or ISA comes down to understanding their differences, assessing their tax benefits and withdrawal rules, and determining how they align with your unique financial situation.

This guide will help you understand the key aspects of SIPPs and ISAs, and how they might fit into your overall financial plan.

William Stevens

Partner, Head of Wealth Planning

ISAs vs SIPPs: who are they suitable for?

Let’s take a closer look at what a SIPP and ISA are, and how they might suit your long-term financial goals.

Capital at Risk

Please be aware that the value of your investments may fall as well as rise. The content of this blog post reflects our current understanding of UK legislation and only impacts those within the UK tax system. Tax treatment depends on personal circumstances, and the rules may be subject to future change.

What is a SIPP?

A SIPP is a type of personal pension that offers a hands-on approach to retirement savings, giving you greater control over how your pension pot is invested. Unlike state pensions or traditional workplace pensions with limited investment options, a SIPP allows you to choose from a wide range of investments, including bonds, Collective investments such as unit trusts and investment trusts, or OEICs, equities and cash.

SIPPs are designed for investors of any age who want an increased level of flexibility and control over where and how their funds are invested for retirement. They’re ideal if you’re after a broader selection of investment options and feel you’ll benefit from expert financial advice to guide your decision-making – or if you would prefer an Adviser to manage your portfolio on your behalf.

What is an ISA?

An ISA is a tax-efficient savings account that shields your investments from tax. There are four main types of ISA you can invest in:

Cash ISA: Similar to regular savings accounts but with tax benefits on contributions
Stocks and Shares ISA: Allows you to invest in a range of securities to grow your savings with tax-free returns
Lifetime ISA: Designed to help first-time buyers save for a home or retirement, and includes a 25% government top-up bonus to your contributions
Innovative Finance ISA: Enables you to grow your savings with interest from peer-to-peer lending investments

Junior ISAs are designed for you to build wealth for your child under 18, and they work similarly to a cash or Stocks and Shares ISA, except with specific rules on allowances and withdrawals.

ISAs are great if you want immediate access to your funds, which can be withdrawn tax-free at any time after age 18 – although this is only with specific ISA types, some products may have penalties or notice periods. As a young saver or first-time buyer, you can build your wealth tax-free with careful investment strategies and regular contributions

What tax benefits do SIPPs and ISAs offer?

Another key thing to know when considering a SIPP or ISA is their tax benefits. Each investment vehicle offers tax efficiencies, but they work in fundamentally different ways.

SIPP tax benefits

SIPPs offer significant tax advantages that make them particularly attractive when maximising your wealth for retirement.

When investing in a SIPP, you receive tax relief on contributions at your marginal rate on contributions up to your annual allowance (currently £60,000 as of the 2025/26 tax year) or relevant earnings.

This means you receive a government top-up when contributing to your pension. For instance, a basic rate taxpayer effectively pays only £80 for every £100 that goes into their pension (including the 20% tax relief). As a higher or additional rate taxpayer, you can claim even more tax relief.

Also, investments within a SIPP grow free from UK Income Tax and CGT, allowing your retirement savings to compound more effectively over time.

And when it comes to withdrawing from your SIPP, you can take a tax-free lump sum of 25% of your total pension pot. However, this is subject to you reaching retirement age (currently 55, rising to 57 in 2028), and only taking up to 25% of the total Lump Sum Death Benefit Allowance (LSDBA) – which stands at £1,073,100 for the current tax year.

ISA tax benefits

ISAs also offer valuable tax advantages, but they work differently from the benefits of an SIPP.

Whilst you won’t receive tax relief on contributions to your ISAs - except for a Lifetime ISA - any compound interest or dividends are free from Income Tax and CGT. This way, you can potentially grow your savings substantially with strategic investments in a Stocks and Shares ISA, without the impact of tax.

Any withdrawals from your ISA are also free from tax, no matter how much you withdraw or when you do it. This flexibility is key for investors who want to effectively manage their cash flow or navigate big purchases as and when they occur.

How do contribution allowances differ?

Whether you invest in a SIPP or ISA, you will have limits on how much you can contribute each tax year. Once again, these limits work quite differently, which requires the right approach for each type of investment.

SIPP contribution allowances

The key SIPP allowances for the current tax year:

Annual Allowance: The standard annual allowance for pension contributions is £60,000. This covers all contributions to your pensions, including those made by you, your employer, or any third parties.
Tapered Annual Allowance: For high earners, the annual allowance may be reduced – or "tapered" – by £1 for every £2 that you earn over the £200,000 threshold income or £260,000 adjusted income. This can potentially reduce your allowance to as low as £10,000, where the tapered allowance is capped.
Money Purchase Annual Allowance (MPAA): Once you've already started drawing flexibly from your SIPP, your annual allowance may be reduced to £10,000.
Carry forward allowance: You can potentially utilise unused annual allowances from the previous three tax years, which can be particularly useful for maximising pension contributions. This is subject to your carry forward not exceeding the tapered allowance or the MPAA if it has been triggered.

Employer contributions: It is important to note that any contributions made to your personal or workplace pension via an employer will use up your annual allowance. In a workplace pension scheme, employers are legally required to contribute a minimum of 3% of an employee's qualifying earnings towards their pension.

ISA contribution Allowances

There is only one allowance for ISA contributions, known as the annual ISA allowance. For the current tax year, the ISA allowance is set to £20,000. However, there are some key considerations when it comes to using this allowance:

No carry forward: This is a "use it or lose it" allowance, unlike with pensions, meaning you cannot carry forward unused allowances to future years.
Lifetime ISA allowance: The Lifetime ISA has a limit on how much you can contribute each year, which is currently £4,000.

Flexibility across ISA types: Your annual allowance applies to the total investments across each kind of ISA you invest in within the tax year - including your contributions up to your Lifetime ISA allowance. This means you can make all your contributions to one ISA or spread your £20,000 across different types of ISAs.

Flexible ISAs: Some ISA providers (like Killik & Co) offer "flexible" ISAs, which allow you to withdraw money and replace it within the same tax year without affecting your annual allowance.

When can you withdraw from a SIPP or ISA?

Withdrawing from your chosen investment account is also essential to consider when selecting a SIPP or ISA. The accessibility of your investments is one of the most significant differences between SIPPs and ISAs.

SIPP withdrawal rules

SIPPs are designed for saving towards your retirement, meaning you cannot usually access your SIPP before the minimum pension age. You can't usually access your SIPP before the minimum pension age, which is currently 55 – rising to 57 in 2028. There are some exceptions where you may be able to access your pension earlier due to ill health conditions, subject to certain rules.

Once you reach the minimum pension age, you have several options for accessing your SIPP.

Firstly, you take up to 25% of your pension pot as a tax-free lump sum, as long as it’s up to 25% of the LSDBA (£268,275). The remaining 75% stays invested, and you can choose how to receive the rest of your pot, although tax charges will apply at your marginal rate. You can:

Take the rest of your pot in lump sums or as a whole
Use income drawdown to take income as needed
Purchase an annuity for guaranteed income

The restricted access to SIPPs can actually be beneficial, as it discourages short-term withdrawals and promotes a strategic and disciplined retirement planning approach. This is ideal when you’re a young investor preparing early for the retirement you want.

ISA withdrawal rules

ISAs are much more flexible when it comes to accessing your invested funds.

Most ISAs offer immediate access to your money without any penalties or tax consequences, though some products may have specific terms. There’s also no age restriction on when or how much you can withdraw from an ISA.

The exception is the Lifetime ISA, which incurs a withdrawal penalty if you access funds for purposes other than purchasing your first home or withdrawing after the age of 60. This penalty essentially removes the 25% government bonus you receive on contributions.

The flexibility that ISAs offer makes them ideal for short-term financial goals that may arise before retirement.

Choosing the right one for your financial goals

Whether you invest in a SIPP or ISA, both investment vehicles provide a range of tax benefits and specific allowance and withdrawal rules to suit your unique financial situation.

SIPPs offer tax relief on contributions, tax-free cash withdrawals, and long-term investment growth to build your wealth effectively for retirement. ISAs allow funds to grow tax-free and provide immediate access to your funds without tax implications.

That said, the choice between a SIPP or ISA isn't necessarily an either/or decision. Many investors will benefit from having both as part of a diversified approach to saving for retirement.

Many Advisers recommend a balanced approach using both SIPPs and ISAs. Use your SIPP for long-term retirement planning, benefiting from tax relief and a wide variety of investment options that offer tax-free growth.

Use ISAs for more immediate financial goals that can meet your short-term requirements without impacting your pension pot for the future.

To determine whether a SIPP, or ISA, or combined approach is right for your specific situation, speak to one of our Advisers. You’ll receive personalised guidance that’s tailored to your unique circumstances, helping you maximise the benefits of both SIPPs and ISAs to achieve your financial goals.