Which is best for investments – an ISA or a SIPP?

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There are many different ways you could invest your money to build your wealth. Individual Savings Accounts (ISAs) and Self Invested Personal Pensions (SIPP) are two common choices for investors.

But which is best for you and your financial situation?

To help inform your decisions, we’ve put together this article to show you what ISAs and SIPPs are, and how they might benefit your finances.

What is an ISA?

An ISA is an investment account that allows you to save money each year, and shelter it from tax. The amount you can invest each tax year is dependent on the current ISA allowance.

As of the tax year 2023/2024, the ISA allowance is £20,000.

There are four types of ISA you can invest in – a cash ISA, stocks and shares ISA, lifetime ISA, and innovative finance ISA.

Your allowance must be shared across all your investments in each type of ISA per tax year. You can also only open one of each type annually.

How can ISAs benefit your finances?

ISAs can benefit your finances in various ways, including:

• Additional tax-free savings – ISAs allow you to save a sum of money each year that’s sheltered from tax. On top of your personal income tax allowance, pensions, or any other investments you have, this can be a great form of additional tax-free savings each year.
• Combined allowances – Since ISA allowances apply to every individual, you can make sure you use the full allowance for both you and your spouse, and this can equate to a total of £40,000 in tax-free savings.
• Tax-free gains – Investing in a stocks and shares ISAallows you to grow your wealth from potentially successful investments. Any growth you make from this will not be charged with Capital Gains or income tax.

What is an SIPP?

An SIPP is a particular type of personal pension that allows you to grow your savings for when you retire.

With an SIPP, you save your money into your pension pot, and this money is invested in certain securities – similar to standard personal pensions.

The difference with an SIPP is that you have more control over the investments made with your pension savings. For instance, this could involve company shares, investment trusts, collective investment funds, etc.

You can contact your SIPP provider to adjust the investments made with your pension savings when you like.

How can SIPPs benefit your finances?

SIPPs can benefit your finances in many ways, such as:

• More control over investments – SIPPs offer you more control over your investments, so you can choose the right level of risk and potential reward that aligns with your financial situation.
• Optimised contributions – With an SIPP, you can choose to contribute certain amounts at whatever times you choose, so you can grow your wealth without compromising your financial circumstance.
• Reaching your retirement goals – Building your wealth effectively with SIPPs can give you the best chance of a successful outcome for all your financial goals when you choose to retire.

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With this information, make sure you contact your modern wealth manager to find out whether you should invest in an ISA, SIPP or both, to effectively build your wealth.

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Please note, the value of your investments can go down as well as up.

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