As the dust settles after the momentous budget of 2014, should you put your money into a SIPP or ISA?
Given The Tax Advantages, There’s Always Been Strong Debate As To Whether A SIPP Or ISA Is Better
SIPP Or ISA - A Quick Comparison
Here’s an overview of the key differences between a SIPP and an ISA.
SIPP Or ISA – Post-Budget Analysis
Historically, an ISA has always triumphed over a SIPP in terms of flexibility. But since the budget changes to the rules surrounding income drawdown for SIPPs, the winner is not so obvious.
From April 2015, providing you’re at least 55, you’ll be able to withdraw the whole of your pension fund. The first 25% is tax free. The remainder is taxed at your marginal tax rate. Whilst the pension changes were dramatic, ISAs weren’t forgotten in the budget.
In the radical changes, from July 2014, savers can stash away £15,000 in the tax-free wrapper, and all of it will be able to be held as a cash ISA. The Government has dubbed the accounts New ISA, or NISA. And for the first time ever, savers will be able to transfer previous years’ funds from stocks and shares ISAs into cash ISAs, a move that’s never previously been allowed.
SIPP Or ISA – Flexibility and Tax Efficiency
Reflecting on the increased flexibility of pensions, Alastair Black, head of customer income solutions at Standard Life, coined the term ‘Pension Savings Accounts’, in a not dissimilar way to ISAs, which are ‘Individual Savings Accounts’.
He’s of the opinion that SIPPs have much more in common with ISAs now, and are indeed a better bet, saying: “George Osborne unlocked the door to pensions but threw away the key. Pensions are now better than an ISA – tax free like ISAs but unlike ISAs you get a bonus payment from the government. Why wouldn’t you invest in a pension?”
There’s no doubt that purely from a numbers perspective, tax relief on contributions and the ability to withdraw 25% of your fund tax free makes a SIPP more attractive compared to an ISA, even the NISA with the increased £15,000 limit.
But despite the ability to access the whole fund from April 2015, they aren’t as accessible for two reasons:
- 1. You have to be at least aged 55 with a SIPP, but there is no age restriction with an ISA.
- 2. You could end up paying an unnecessary amount of Income Tax if your SIPP withdrawal isn’t at an optimum time for your tax position.
The second point has been acknowledged widely. As a principle, people don’t generally want to pay high rates of tax. It’s highly likely they’re much more likely to stagger their SIPP withdrawals in line with their other income, to minimise their Income Tax burden. And that has a detrimental effect on the flexibility of SIPPs compared to ISAs.
SIPP Or ISA – Heads You Win, Tails You Don’t Lose
On the basis that a SIPP is more tax efficient, and an ISA is more flexible, there’s no clear winner. The fact they’ve both gained benefits from the budget is good news all round.
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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets
Over time, charges can wipe out a huge part of your fund. We like AJ Bell because there are no set-up costs. If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund. And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment). However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.
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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk. Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.
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