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SIPPs vs ISAs: pensions knock ISAs into a cocked hat if you want to retire

It’s become fashionable to rate ISAs ahead of SIPPs as the best place for your retirement savings. Many investors even talk about abandoning personal pensions altogether if that sinister man in 11 Downing Street messes with them one more time.

While this might make for fine, contrarian pub talk – and if you find the pub where they banter about personal finance all night long then please point me to it – in my opinion the vast majority of people are better off storing their retirement funds in a proper pension scheme.1

Tax relief

ISAs and personal pensions both shelter assets from tax on interest, dividends and capital gains – so far, so equal.

But pensions have the edge where tax relief meets tax bands (bear with me).

With ISAs:

  • Savings you put into ISAs have already lost a slice to income tax.
  • Withdrawals from ISAs are not taxed.

So you are taxed on the way in to an ISA but not on the way out.

With pensions:

  • Savings into pensions are not taxed.2 (Income tax relief on pension contributions neutralises the tax chomp.)
  • Withdrawals from pensions are taxed at standard rates of income tax.3

Pensions are therefore taxed on the way out but not on the way in.

If you paid 20% tax on all your income then at first blush it wouldn’t make any difference whether you put your money into an ISA or a pension – they would both receive the same tax holiday.

But part of your income is likely to fall into lower rates of income tax when you retire, in contrast to your earnings when employed.

In other words, a 40% tax-payer can earn 40% tax relief on pension contributions now but may only be taxed at 20% or even 0% when they retire.

That’s an outright gain of 20-40%.

Bear in mind that the personal allowance protects the first £10,600 of your income (and £10,800 from April 2016) from income tax.

A 20% tax-payer is likely to earn 20% tax relief on pension contributions, but a fair wedge of their retirement income may well fall within the personal allowance 0% band.

That means overall they’ll enjoy a 20% boost on their assets that is unmatched by ISAs.

In contrast you’ve already lost 20-45% to income tax on your ISA contributions, before you get the money in there.

The best that can happen is that you don’t lose any more when you pull it out again.

SIPP vs ISA income tax relief

To see how likely you are to benefit, consider that a retirement pot of £262,500 is needed just to earn an income of £10,500, assuming a withdrawal rate of 4%.

You’d need a pot of over £1 million to hit the 40% income tax bracket4 at that 4% withdrawal rate.

That’s a problem few investors will face.

Grow your dough

Choosing a pension over an ISA can make a large difference to the size of your retirement stash as illustrated by the following example.

Imagine Irene Isa pops £8,000 into her ISA every year while Sally Sipp drops the same amount into her personal pension.

So after tax relief at 20%, Sally Sipp puts away £10,000 annually.

Sally and Irene’s investments both grow at an annual compound rate of 4% over the next 20 years.

When the bell dings, Sally Sipp’s pot = £306,888

Meanwhile Irene ISA’s pot = £245,510

The difference is due to the 20% tax relief.

Now they come to draw money from their pension. If Sally’s entire SIPP income was taxed at 20% then it would be the same as Irene’s ISA income.

But Sally doesn’t suffer 20% tax on the entire amount…

Irene ISA’s annual income is £9,820 assuming a withdrawal rate of 4%. She isn’t taxed on any of it as she’s withdrawing money from an ISA.

Sally SIPP’s gross annual income is £12,275. Most of that income comes in under her annual personal allowance, which is £10,500 at the time of writing. She is only taxed on the relatively small portion of her income above this limit.

Sally’s net annual income is £11,920 – after 20% tax on that portion of her annual withdrawal above the £10,500 personal allowance.

So Sally’s net income is 21% larger than Irene’s.

Now I haven’t factored in the State Pension into those calculations because Sally and Irene retired age 55. A State Pension will push you closer to a higher tax band, so if you aren’t planning on retiring until your late 60s then the advantage of pension schemes over ISAs is reduced, although not eliminated.

Also remember that the tax benefits are doubled if you’re part of a couple that maximises your personal allowances and pension schemes.

Finally, there’s the 25% you can withdraw from your pension tax-free.

25% tax-free withdrawals from pensions

This is a straight ace from your pension scheme. You can withdraw 25% of the whole pot and pay no tax whatsoever on that sum when you reach the minimum pension age.

Again, you’ve just made a 20-45% gain above and beyond anything you can achieve with the same investments in an ISA.

That’s not to be sniffed at.

What’s more, pension income recycling enables you to repeat the trick.

  • Withdraw money from your pension and squirrel it away into a new pension scheme. The tax relief on the new pension contribution instantly negates the tax incurred on the withdrawal.
  • You can then crack open the new pot and claw out another 25% of tax-free, lump sum honey.
  • If you’re still working then you can put the lower of your annual earnings or £10,000 into your new pension. If you’re fully retired then you can put in £2,880 every year, which is topped up to £3,600 by HMRC.

To be fair, you can recycle savings from an ISA into a pension, too, but the point is that it’s only pension schemes that offer the 25% tax-free lump sum.

Note, this doesn’t work if you exceed your lifetime allowance or you’re over 75 or if you try to recycle using your 25% tax-free windfall.

Death taxes

The tax shield surrounding your ISA only remains intact if you pass it on to your spouse or civil partner.

Any other beneficiary (for example, the kids if you were divorced) doesn’t benefit from tax-free income and capital gains on the ISA portion of your savings when you exit the stage.

Your ISA holdings would fall into your estate in that instance5 so 40% inheritance tax will be due on any part of your wealth over and above your allowance (usually £325,000) including your house and all other assets.

The situation is much more favourable for pensions although it partly depends on the individual details of your scheme.

Most pensions aren’t liable for inheritance tax and aren’t taxed at all if you die before age 75 no matter who your beneficiary is. If you shuffle off after 75 then the chances are that your remaining pension will only be taxed at your beneficiaries’ marginal income tax rate.

Check out this superb ‘in a nutshell’ table for the full tax rundown.

Salary sacrifice

Most people are aware that they should stash enough into their workplace pension to get the company’s maximum match.

It’s a double-your-money game. For example with some schemes you can put in, say, 5% of your salary to get another 5% from your company. To turn down this opportunity is to turn down free dosh.

What’s less well known is that you also avoid national insurance if your company scheme operates on a salary sacrifice basis.

National insurance is a hefty 12% loss for basic-rate taxpayers so tax relief is effectively 32% in a salary sacrifice scheme versus an ISA. Meanwhile, higher-rate payers take a 2% NI nip and so can earn tax relief of 42%.

You will save national insurance on any amount that you divert into a salary sacrifice scheme. You don’t have to stop once you’ve maxed out the company’s match.


We’re wandering into the weeds now but you can’t keep putting money into ISAs if you move abroad, unless you are a Crown employee.6

But you can keep up your pension contributions from overseas under a wider range of circumstances. (The fiddly details are beyond the scope of this post.)

Also, if you fall upon hard times, ISA assets will affect most mean-tested benefits whereas pre-retirement pensions will not.

Where ISAs win

Accessing your money whenever you damn well please is the inarguable advantage that ISAs have over SIPPs and other forms of pension scheme.

That makes an ISA ideal for all financial objectives short of retirement at the minimum pension age.

Extreme early retirement, mortgages, university fees, emergency funds and so on – I would definitely use an ISA to meet any of these goals.

But it’s a combination of SIPP (or stakeholder pension) and workplace pension all the way if you want to hit retirement at age 55 or beyond.

The long game

The very flexibility of an ISA is a risk in itself when saving for a long-term goal like retirement.

Can you be sure you’ll resist dipping into your funds to relieve some emergency or overwhelming desire along the way?

The temptation is ever present and can set back your retirement by years.

The recent changes to pensions make your pension just as flexible as an ISA when you finally come to generate an income, although that also means there’s some risk of foolish cash splashage by newly minted retirees who don’t know what they’re doing.

Finally, some argue that ISAs are less prone to regulatory meddling than pensions. Historically that’s certainly been the case.

Even now, the current Government is consulting on pushing back the minimum age for private pensions from 55 to 57 by 2028. The plan would then be to peg the private pension age to the State Pension age so that there’s always a 10-year gap between the pair.

Moreover, 40% tax relief is favourite for the chop no matter who wins the next election.

But to my mind neither development destroys the superiority of the personal pension over the ISA when it comes to drafting you towards retirement.

Mix and match your cash

Some like to hedge their bets by investing in ISAs and SIPPs.

A hybrid solution could be just the ticket if you want to retire before the minimum pension age. You could use ISA assets to cover you for a few years before switching to your pension.

But before you decide, work out your financial plan and calculate when you’re likely to retire. If that date is beyond the minimum pension age then you will probably be better off with a pension scheme.

Take it steady,

The Accumulator

Note: This post on pensions versus ISAs was updated in April 2015. Some reader comments below may refer to earlier rules and regulations.

  1. I’m assuming you don’t have access to a defined benefit pension scheme and that you’ll make use of the best defined contribution scheme for your purposes e.g. SIPP, stakeholder pension or work-based pension. []
  2. Assuming you stick within your annual allowance of £40,000 and lifetime allowance of £1.25 million. []
  3. Not including your 25% lump sum – we’ll come back to that. []
  4. £42,386 from April 2015. []
  5. The exception is shares in firms listed on the Alternative Investment Market (AIM) that you’ve held for two years or more. []
  6. Or spouse / civil partner of a Crown employee. []

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{ 110 comments… add one }
  • 101 gadgetmind July 30, 2016, 5:25 pm

    I’ve had a quick look at a few documents but I think you really need to ask someone else. They allow “Flexible Retirement” but the document I found only discusses accessing the DB part even though it’s mentioned in the “Builder” document. However, this document also discussed accessing before retirement by “transferring out” the DC pension.

    BTW, using DC/AVC to retire early without having to access your DB pension is very common.

    As for this USS pension being any good, those without any DB/FS pension would sell a kidney (and might have to!) to get anything like as good a deal.

    You’re also getting a good deal on fees on the DC part.

    “Your employer has made a commitment to subsidise the majority of the fund investment management charges for the foreseeable future, so you won’t have these charges deducted from your contributions.”


    There are the switching fees on page 18, that seem designed to stop you messing around too much, but I think you know the “house message” on messing around. 🙂

    If you can contribute to this DC pension by salary sacrifice (so avoiding NI), and have fees mostly paid for you, and access/transfer at age 55(ish), you’d need a *very* good reason to run the same kind of SIPP/PP as used by us commoners alongside.

  • 102 gadgetmind July 30, 2016, 6:37 pm

    BTW, your comments suggest that you’re on >£55k, and are looking at pension contributions both for early retirement and perhaps tax reduction. If so, then you may also want to consider Venture Capital Trusts, but these are high risk relatively speaking. The are complex, but the VCT regulations are a doddle to understand compared to the twisty passages of pensions.

  • 103 Teddy July 30, 2016, 10:23 pm

    Once again thanks Both,

    I think you have both confirmed that what I am thinking of is feasible IF my pension provider allows it…to understand this I will need to speak to them…thanks for your thoughts though.

    As for being a 40% tax payer…that would be nice but there is no chance there!… hence the need to make ‘every little count’ and why I (eventually) now realize how important it is and why I shouldn’t have ignored it for so long!

  • 104 Jeffrey Beranek November 22, 2016, 1:32 pm

    A few other considerations… Platform charges for SIPPs tend to be a little higher. Withdrawals from a SIPP in retirement are slightly more restrictive and/or costly. There’s a lot to be said for being prevented from withdrawing money from a pension until you retire for behavioural reasons. Pensions are generally better protected by dual taxations treaties and are more readily available to US persons resident in the U.K. There’s no such thing as a defined benefit ISA, (nor ISAs with index-linking or spousal payouts). Pensions can be inherited free of IHT and not just to your spouse. Some things can be held in a SIPP that can’t in an ISA (especially full SIPPs).

  • 105 Decumulation March 2, 2017, 11:45 am

    A financial plan for your life and decumulation.
    Many people go through life without any financial planning by reacting to the situation day by day or year by year. People’s attitudes to saving, investment and spending differ widely.
    I have a plan that has been honed over 50 years as my limited financial knowledge developed. I was sold what was really a worthless life insurance at university. I saved a little in a building society. I was enticed into setting up an additional voluntary contribution plan in my 20’s. I obtained a mortgage when I married. I accumulated various work pensions. I started investing in stocks and shares prior to the Dot Com boom using an ISA. I then started building a Self Invested Personal Pension.
    Most years we sat down and did a yearly budget mainly to decide on what major spends we could afford.
    Some longer term plan was required, so when I was 50 I tried to predict future life events that might affect my financial situation. This can be complex and imprecise but by simplifying and making best guesses or by considering a range of values you can accommodate likely scenarios. Of course, everyone will have a different set of parameters based on employment prospects, marital status, children and other family demands or opportunities.
    I made my best guess as to when my parents, I and my wife would die. When my child would be self-sufficient and set up home, and when I might retire. Then I looked at likely costs such as care for my parents and the movement of assets such as homes. This created a basic timeline of events and income and spending requirements. This planning helped finance a home for my child and later a sheltered home for my parents.
    Changes in pension legislation and the opportunity to take early retirement prompted much research and discussion resulting in a complex spreadsheet. This was used to decide whether to take early retirement which I did, but then was offered a job so I carried on working. More research and spreadsheet planning meant I fed into more AVC and SIPP pension schemes.
    Approaching state retirement age I contacted the adviser who sold me the AVC 40 years previously. He alerted me to freezing my lifetime allowance at £1.8 but also suggested moving my AVC into the SIPP. My investment portfolio had been moulded over the many years moving from company shares, to unit trusts through to index funds. Much research was done on how to balance my investments. This too is very personal and I decided to have a fund equally balanced between gold, bonds and equities with the equities equally divided between UK and non-UK equities. The home was considered part of the investment portfolio. Over the 10 years this balance has been in place I have been pleased with it as it coped well with booms and busts and currency fluctuations.
    So now to the crunch! I have to start ‘decumulating’. Once again this is personal. In my case my parents and wife have died and my child has their home, all events approximately following the plan set out many years ago. My biggest problem is provisioning for care in my old age so I set about defining my yearly spend for the next 30 years. Based on current cost and taxes I estimated by yearly net income requirement being £36k between 70-75, £41k between 75-80, £46k between 80-85, £51k between 85-90 and £71k from 90 -100.
    Of course, I cannot predict changes to tax rules or inflation or investment rates so I assumed current tax and a difference of 5% between investment performance and inflation.

    The first objective is not to run out of income and the second is to minimize tax and the third to maximize my inheritance, so various plans were considered. The main driver is that a large income is required later on in life as this moves the income from the pensions into the higher income rate band. This assumes that there will be no future tax relief on care home costs. One way of mitigating this is to use the income from the ISA which is tax free. One way of maximizing this tax free income is to always take income from the SIPP up to the higher tax rate and put the tax free component into the ISA for later drawdown.

    To minimize inheritance tax you should reduce assets in your estate such as ISA and home below the allowance which may be up to £650k.

    The first model plan draws down the ISA first and then draws down the SIPP without touching the equity locked up in the home. Under this plan in my case the ISA runs out when I am 82 and the SIPP when I am 100.
    The second model plan draws down the SIPP up to higher tax band limit with the 25% tax free going into ISA. Under this plan in my case I start depleting the ISA fund at age 75 when I need income above the higher rate tax band. The ISA fund runs out when I am 91 when all income is taken from SIPP. The SIPP would run out at 101.
    There are many variations to these two basic plans that may maximize the residual inheritance but the idea of holding on to the ISA is contrary to most IHT planning I have seen.
    Other plans involving releasing the equity in the home to fund an ISA may also improve the Income Tax bill in later life and will minimize IHT so are worth considering. Has anyone any comment as I have not yet put these into my spreadsheet model?

  • 106 Aleksander March 19, 2017, 1:09 pm

    The post should include information about possible changes to the ‘private pension age’:


  • 107 Zarquon September 5, 2017, 10:43 am

    Hi all

    Firstly, I want to say I’ve found this site absolutely superb and have really learned a lot.

    My query is around pensions – whilst I have built up a good sized ISA pot (£130k Vanguard 80LS on Interactive Investor) over the last 5 years, I have neglected my pension(s).
    I already have two work pension schemes
    1) £280k with Fidelity from former employer. Invested in BLACKROCK GLOBAL 50/50 INDEX FUND, AMC 0.13%. Can’t add to.
    2) £32k with Scottish Widows through current employer, invested in default Pens Portfolio Two, AMC 0.7% . As I understand it, this is a basket of mostly index funds that comes with a lifestyling option to change investment/risk over time

    At age 43, I’ve now realised I ought to be paying more into my pension and in particular taking advantage of tax relief where I can since I’m in higher rate band. My question is should I
    a) Use my employer salary sacrifice scheme and try to max out 40k pension allowance ? This way I get NIC + tax relief at source. (Employer contribution will not change, there is no matching they pay flat 1%).
    b) Start a SIPP and invest into Vanguard funds again, possibly 60LS ? Understand here I would have to claim relief via my tax return and there is no benefit to NICs

    I lean towards (a) as it seems simpler all round, but Scottish Widows seems to have higher charges and is a little opaque (also website is *really* dreadful). I really like the Vanguard funds due to low cost and transparency.

    Any suggestion/inputs welcome!


  • 108 The Accumulator September 16, 2017, 6:16 pm

    Hi Zarquon, it’s a question of what you value more: the extra 10% or the lower costs and transparency. When I did the maths on my personal circumstances, I discovered that my favoured SIPP option would struggle to beat the extra 10% over the next couple of decades, so I took the salary sacrifice option.

  • 109 Vano April 24, 2019, 9:28 am

    Great article, this.
    I would also add that the real-life advantages of an ISA are somewhat nebulous and arbitrary vs even a standard taxable account; your investments will need to perform to take advantage of the tax shield – that is to say that being able to realise £11k in annual capital gains is not that easy to achieve without many years of contributions and compounding, while the advantages of of the pension are guaranteed and instant (expect you just can’t actually draw on them until retirement). So in my view, ISA is either a VERY long term play where you plan to run your pot over >£1m, or a supplementary bridging fund until you can access your pension. Ironically they’re probably at their comparative worst when compared as a like-for-like alternative for a pension for the vast majority of people.

  • 110 Gadgetmind April 24, 2019, 5:43 pm

    We have ISAs (been building them since they were PEPs in 1989ish) and also unwrapped income that is being dribbled into ISAs as subscriptions allow.
    Even a £250k unwrapped pot can throw off enough dividends and income to make tax complicated, and the dividend allowance dropping makes things even harder. And no, accumulation funds *don’t* solve this problem, so use ISAs!

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