The below table looks at some of the key characteristics of both based on some commonly asked questions.
*This is the amount for most people, there is going to be a sliding scale introduced on 6th April 2016 reducing the allowance the more you earn.
**You can put more in but anything over £1million will be subject to additional tax.
***You will have to be a member of a pension scheme for that period to make the most of this benefit.
It might well be possible to put more into a SIPP every year – if you can afford it – and there are the tax benefits at the other side when you draw it down but ISAs offer greater flexibility, especially when you need it.
Double the tax efficiency
Having both and – in those cases where people can afford it – maximising the allowances, will ensure even more of your money can work harder by being tax-efficient. That’s effectively £54,240 a year that you could be putting away that is tax efficient.
Even if your salary won’t permit you access to the maximum £40,000 SIPP allowance, it could still make sense to balance contributions in both so that you’re saving for the immediate future and retirement.
If you think of a SIPP as your longer term pot of money – that you are happy to not touch and just let it build up – and your ISA for medium term goals (or maybe early retirement) – giving you access to money that you might need for a change in circumstances – then you have two investment tools working for you.
The subtle benefit of SIPP
As we’ve already pointed out, when it comes to withdrawing money from your SIPP you can normally take 25% tax free but the rest is liable to income tax.
However, and this is where a SIPP can make your money work harder, everyone is eligible to an income tax personal allowance of £10,600 (increasing to £11,000 in 2017/18) on which they don’t pay tax. For example, if your pension pot allows you to withdraw, say, £12,000 a year in retirement and you are not receiving any other taxable income, you will only pay 20% tax on £1,400 of it.
Flexible tax-efficient saving
Changes in the ISA landscape will soon allow you to save in an ISA and withdraw from it without affecting your allowance.
Currently, any money you withdraw and then replace in your ISA will affect your annual allowance. So, if you withdrew £2,000 and then replaced it a week later your annual allowance will have been reduced by £2,000 whilst your ISA’s actual balance remains the same.
New Flexible ISAs – coming in the autumn to TD Direct Investing customers – remove that so you can withdraw and replace without affecting your allowance. However, it’s important to remember that ISAs are medium to longer-term investments and are different from a current account.
With so many benefits, those looking for longer-term investments as well as more medium-term ones could well benefit from having both an ISA and a SIPP.
Find out more about TD’s SIPP.
Find out more about TD’s ISA.
TD Direct Investing does not provide tax advice. Please note tax treatment depends on the individual circumstances of each customer and may be subject to change in the future.
The TD SIPP is aimed at clients who have sufficient knowledge and experience of investing to make their own investment decisions and want to actively manage their investments. The TD SIPP is not suitable for every investor. Other types of pensions may be more appropriate.
The investments made within a TD SIPP can fall as well as rise and you may end up with a fund at retirement that’s worth less than you invested. Prior to making any decision about the suitability of a TD SIPP, we recommend that you seek the advice of a suitably qualified financial adviser.
The post SIPP v ISA or best of both worlds appeared first on News and Views.