3 differences between a stocks and shares ISA and a SIPP

A stocks and shares ISA is different from a SIPP in a number of ways. However, three of their main differences include the amount that can be paid into them each year, at what age they can be accessed, and when tax is charged on them.

Both are popular methods of planning for retirement in a tax-efficient manner. Which one is right for any individual is likely to come down to personal circumstances and preferences. Therefore, taking time to consider their pros and cons before opening them is likely to be time well spent.

Stocks and shares ISA vs SIPP: annual payments

One of the most obvious differences between a stocks and shares ISA and a SIPP is how much money can be paid into them in each tax year.

With ISAs, there is a £20,000 annual allowance. This means that it is not possible to pay more than that amount into them – even if withdrawals have been made. The amount that can be paid into an ISA is always subject to change depending on government policy, so it may or may not remain at that level in future.

The annual tax-exempt amount that can be paid into a SIPP is £60,000. This is also subject to change depending on government policy. It’s significantly higher than an ISA’s annual allowance, which may be relevant for some people depending on their annual income and how much they wish to pay into their pension each year.

Age that funds can be withdrawn

Stocks and shares ISAs and SIPPs also differ in when individuals can withdraw money from them. With ISAs, withdrawals can be made at any time. There is no penalty for withdrawal, although only £20,000 can be paid into an ISA each year. This may make them more flexible for people who may wish to draw on their pension at times during their lives.

A SIPP can only be accessed from age 55. This may rise to 57 in the next seven years – depending on government policy. This means that any money paid into a SIPP cannot be withdrawn in the short run for many people. Therefore, it is worth considering whether it is acceptable to tie up funds for the long term via a SIPP.

Tax treatment

Tax is always a complex topic. However, on a basic level, amounts paid into a stocks and shares ISA are made after tax has been paid. For example, an individual would invest money into an ISA after they have paid income tax, national insurance etc. When withdrawing money from an ISA, there is no tax to pay.

A SIPP is essentially the other way round. Contributions to a SIPP are made before tax has been paid, which can mean there is more money to invest versus an ISA. However, withdrawals from a SIPP are taxed – except for a 25% lump sum that is tax-free.