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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

The choice of vehicle for your savings will depend on your personal circumstances
Thursday 25 Feb 2021 Author: Tom Selby

I currently have a few investments across ISAs, Lifetime ISAs and SIPPs.

I am willing to put money away for a reasonable timeframe, around 25 years, to aid me in retirement.

Would my money bit better off in an ISA, Lifetime ISA or SIPP?

Robert (Money & Markets podcast listener)

Tom Selby, AJ Bell Senior Analyst says:

Whether your money would be better placed in an ISA, Lifetime ISA or a SIPP will depend on your priorities and personal circumstances.

This will likely in part be about getting the biggest bang for your buck via tax incentives, but you will also want to ensure you have the right combination of easily accessible funds alongside money that is locked away.

ISAs benefit from tax-free investment growth and tax-free withdrawals, with a maximum subscription of £20,000 each tax year.

Lifetime ISAs have a lower subscription limit of £4,000 that sits within the overall ISA limit mentioned above but you benefit from an upfront bonus of 25%, up to a maximum of £1,000 per tax year. Once you’ve opened a Lifetime ISA (you must be aged 18-39 to qualify) you can keep paying in and receiving a 25% bonus until the day before your 50th birthday.

The money can then be accessed tax-free for a deposit on a first home worth £450,000 or less, from age 60 or if you become terminally ill. If you access the money in any other circumstances a penalty will be applied (20% of withdrawn funds in 2020/21, due to rise to 25% in 2021/22).

SIPPs benefit from a much higher annual contribution limit of £40,000 (the ‘annual allowance’), with a lifetime allowance of just over £1 million that rises each year in line with inflation. Personal contributions are limited to 100% of earnings in each tax year.

You will receive an upfront boost on your SIPP contributions via 20% basic-rate pension tax relief – equivalent to the 25% bonus offered through a Lifetime ISA – while higher and additional-rate taxpayers can reclaim extra 20% or 25% tax relief, via their tax returns respectively.

You can then access a quarter of your fund tax-free from age 55 (rising to 57 from April 2028), with the rest taxed in the same way as income.


In terms of the outcome for someone in retirement, let’s compare someone who pays the maximum possible into a Lifetime ISA - £4,000 a year for  33 years – with someone who pays the same amount into an ISA and a SIPP.

If they enjoyed 4% investment growth each year, by age 66 the Lifetime ISA investor could have a tax-free fund worth £645,000.

The ISA investor, meanwhile, could have a tax-free pot worth £516,000 after paying in the same amount over the same time period.

The SIPP investor could have a fund worth £645,000 – the same as the Lifetime ISA investor – with 25% available tax-free and the rest taxed in the same way as income. They could then limit the income tax they pay by staggering their retirement withdrawals.

If they were a higher-rate taxpayer they could have reclaimed an extra £33,000 in tax relief via their SIPP, while an additional-rate taxpayer could have reclaimed £41,250.

If that reclaimed tax relief was invested in an ISA each year, it could have generated a tax-free pot worth £129,000 (higher-rate taxpayer) or £161,000 (additional-rate taxpayer) by age 66.

One other key difference to bear in mind is the tax treatment of SIPPs on death.

Unlike ISAs and Lifetime ISAs, any money left in a SIPP won’t count towards your estate for inheritance tax purposes, and can usually be passed on to your nominated beneficiaries tax-free if you die before age 75, while if you die after 75 it will be taxed in the same way as income when they come to make a withdrawal.


Send an email to with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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