Building up your nest egg: SIPPs vs ISAs

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Buying shares is one way of making money for the present that can also help you save for the future, and there are different options available when it comes to putting them aside for a rainy day.

ISAs (Instant Access Savings Accounts) and SIPPs (Self-invested Pension Plans) offer two different ways of building up a nest egg for your retirement. Buying shares through dealers such as Interactive Investor continues to be a popular way of long-term investing with a SIPP, but certain types of ISA also allow you to deal in the stock market. Choosing between these options is really a matter of deciding which one best suits your personal circumstances.

What can you save?

Since April 2006, every adult can invest a maximum allowance of £11,520 per tax year in a stocks and shares ISA. A maximum of £5,760 of this allowance can be saved in cash, allowing you accumulate a decent sum.

SIPPs, on the other hand, can be slightly trickier to deal with than ISAs. But they do have their benefits, offering a wider range of options for investment than your average pension. It’s possible to invest in a range of assets, including shares, UK government bonds and commercial property. There’s also a much bigger £50,000 limit to how much of your yearly earnings you can inject into a SIPP.

How can you access your money?

One of the main benefits of saving in an ISA is that you have access to your money whenever you need it. But if you’ve a tendency to regularly dip into your savings, this could be seen as a pitfall. In this case, you might be better off investing for the longer-term with a SIPP, which doesn’t allow you access to your funds until you turn 55.

This can be seen as a pro and a con however: the long-term investment is relatively sheltered from market changes, promising you a significant return at retirement age, but if you suddenly need access to a large sum of money, a SIPP can be restrictive.

Gold Investment

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How much tax-free earnings can you get?

ISAs are better if you want to be able to draw an income without paying tax, whenever you like. SIPPs are subject to income tax. However, this option allows you to draw 25% of your pension pot tax free on reaching your 55th birthday. Any subsequent withdrawals are subject to monthly deductions.

With ISAs you only pay 10% tax on your dividends. It’s worth noting that higher rate tax payers are required to pay tax at a rate of 32.5% on any dividends earned from buying shares outside of an ISA. That jumps to 42.5% if you’re an additional rate taxpayer. So if you’re a higher-rate payer, a SIPP might be a better option, due to tax relief on your contributions.

It’s worth bearing in mind that pension rules are often subject to change by the government, whereas ISAs have remained relatively untampered with. For the most flexibility, therefore, it might be wise to consider both an ISA and a SIPP investment.

Image by Iman Mosaad, used under Creative Comms license

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