Your Guide To ISA’s And SIPP’s

Do you have a plan for your retirement?

Maybe you have some other financial goals for the long term?

If you go for an ISA or a SIPP you can make contributions on a regular basis for your future. Planning for your future is very important. It took me a while to realise this.

Don’t overlook your pension and long term savings. It may all seem a long way away for you at the moment but time moves fast and you want to ensure that you have been smart and planned for your future.

Why should you even consider an ISA or a SIPP?

Both will provide tax relief and compound interest on your savings. But you need to understand the differences between them so that you can make the right decision on which one is best for your financial goals.

And that is what this post is all about.

I will explain the difference between an ISA and a SIPP so that you can make the right decision.

The Difference between an ISA and a SIPP

An ISA (Individual Savings Account) is a scheme backed by the UK government. It has an investment limit of £20,000 per year. When you open an ISA you will have a number of different investment opportunities to grow your money. I will discuss some of these options a little later.

One of the best things about an ISA is that you can withdraw your savings at any time completely tax free.

With an SIPP (Self Invested Personal Pension) there are no limits on the amount of money that you can invest. But the government will only give you tax relief on £40,000 every year. You cannot withdraw funds from an SIPP until you reach the age of 55. The government is planning to increase this age limit soon.

You will have to pay tax on any funds you withdraw that exceed 25% with a SIPP. There are opportunities to save on income tax by withdrawing money in stages rather than in one go (not withdrawing everything in the same tax year).

You can have an ISA and a SIPP

If you have a number of different savings goals then you can take advantage of having both an ISA and a SIPP. By having an ISA and a SIPP you will be able to save for both the medium term and the long term. It is certainly worth thinking about.

The other main advantage of having an ISA and a SIPP is tax relief. If you have both then the limit on tax relief increases to up to £60,000 each year. This is a large sum and you can also benefit from the flexibility of having an ISA and a SIPP, no matter how much you intend to save using these schemes.

I like the fact that you can compartmentalise your savings by having both. This is a good fit for my goals and it should help you too. By combining these two schemes and working with the top providers available you will be able to get the very best return for your investments.

Invest in an ISA or a SIPP?

You have a lot of good options for investing in your future with ISA’s and SIPP’s. So which one is the best choice for you? Well that is impossible for me to answer as I don’t know your personal circumstances and I am not a financial advisor. Here are some situations where an ISA would be a good option for you:

  • Having a cushion for any monetary emergencies (these do happen)
  • Saving to buy a car
  • If you have children, saving for their education fees
  • Saving for your daughter’s wedding
  • Making a contribution towards your pension

Although you can use an ISA to make contributions to your pension, a SIPP is probably the better option for this. With a SIPP you have a lot more control over your money and you do not have the temptation of withdrawing funds as you do with an ISA.

There is a way that you can use an ISA for your pension as well with similar age restrictions on any withdrawals. With a Lifetime ISA you will have more flexibility than you will with a SIPP as you can withdraw funds before you have reached retirement age.

I am just providing you with an overview of ISA’s and SIPP’s in this post. You need to discuss whether an ISA or SIPP is best for you with a financial advisor. The decision of which to go for depends on a number of factors such as your age, current financial situation and your savings goals.

SIPP versus Stocks and Shares ISA

As the name suggests, a stocks and shares ISA is all about investments in stocks and shares. The best thing is that you will get tax relief on this type of ISA. You need to understand that a stocks and shares ISA can be riskier than a standard savings ISA but the returns can be greater.

With a stocks and shares ISA you will usually hold a broad range of investments in UK shares, international shares, ETF’s, trusts and other available funds. This type of ISA is flexible and you can withdraw funds when you need them without having to pay tax. You will still get the growth on your investment.

As you now know, a SIPP has not investment limits and there is tax relief available for up to £40,000 per annum. So which of these is better for you does depend on your approach to risky investments, your goals and your current financial situation.

Junior ISA or SIPP?

If you want to save long term for your child then you can open a junior ISA or a junior SIPP. With both of these options you will have the benefit of compound interest which will help you to amass a considerable sum even if you start off with small consistent payments.

With a junior ISA you will have a savings account free of tax and your child can take control of this ISA when they are 16 years old. They can only withdraw money from the junior ISA when they are 18.

If you are thinking more long term then you might want to choose a junior SIPP pension scheme. There are tax advantages with this such as relief on the money that you put in. There is also tax free growth and the possibility of exemptions from inheritance tax.

SIPP or Lifetime ISA?

There is a difference between a lifetime ISA and a SIPP.

With a lifetime ISA (known as an LISA) you have to be between the ages of 18 years and 39 years. You can invest up to £4,000 every year with a LISA and the government will give you a 25% bonus.

Although you can withdraw your cash at any time from a LISA you will have to pay a penalty if you do this before you reach 60. You can only make payments into a LISA up to the age of 49. Your investments will continue to earn interest after that.

A SIPP does not have any age restrictions so you could open one from a very young age and keep paying into it for as long as you want. Once you are 55 you can withdraw the funds and use the money for anything that you want. You can also invest more into a SIPP than you can a LISA.

Is an ISA or a SIPP best for your Retirement?

ISA versus SIPP

You need a retirement fund and making the decision to go for an ISA or an SIPP is something that you need to think about. Speak to a financial expert about this decision as they can advise you on charges and fees as well as taxation costs and exemptions.

As I said before it may be best to have both of these schemes working for your retirement so that you get the best of both worlds. There is a lifetime allowance charge which is a tax applicable if you exceed savings limits.

You should also consider inheritance tax. With an ISA you do get tax free investment but later it is likely to be subject to inheritance tax. When you have a SIPP you will probably have more options to pass on your wealth without having to pay inheritance tax.

Both ISA’s and SIPP’s offer advantages and there are disadvantages to take into account as well. It is essential that you discuss all of this with a qualified financial advisor. The most important thing is that you make the decision to save for your future. Don’t leave this too late so that you can get the most benefit from either scheme.

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