SIPP vs ISA: Which Should You Prioritise?

Both offer valuable tax benefits, but they work differently. Understanding when to favour one over the other can significantly impact your retirement wealth.

The Core Difference

In simple terms: pensions give you tax relief now but tax you later. ISAs give you no relief now but are completely tax-free later.

The Pension Advantage

For most working people, pensions come out ahead due to tax relief. When you contribute to a pension:

• Basic rate (20%): Contribute £80, get £100 in your pension
• Higher rate (40%): Contribute £60 net of tax, get £100 in your pension
• Additional rate (45%): Contribute £55 net of tax, get £100 in your pension

Plus, if your employer matches contributions, that's free money you can't get with an ISA.

The ISA Advantage

ISAs win in specific situations:

• Flexibility: No access restrictions—your money isn't locked away until your late 50s
• No tax on withdrawal: Particularly valuable if you expect high retirement income
• No lifetime limits: The pension Lifetime Allowance was abolished in 2024, but ISAs never had one
• Estate planning: ISAs pass to beneficiaries more simply than pensions (though pension death benefits can be tax-efficient too)

A Practical Framework

Prioritise Pension When:

1. You get employer matching — Always take free money first
2. You're a higher/additional rate taxpayer — The tax relief is too good to pass up
3. You're confident about not needing the money before 55 — The lock-in isn't a problem

Prioritise ISA When:

1. You've already maxed employer matching — Beyond the match, ISAs compete well
2. You might need access before 55 — Don't lock money you might need
3. You expect high retirement income — Tax-free ISA withdrawals become more valuable
4. You're a basic rate taxpayer now and in retirement — The pension arbitrage disappears

The Combined Strategy

Most people benefit from using both:

1. Contribute enough to your workplace pension to get full employer matching
2. If you're a higher rate taxpayer, consider additional pension contributions via salary sacrifice
3. Use your £20,000 ISA allowance for flexibility and tax-free retirement income
4. Review annually as your circumstances change

The Numbers Matter

Consider two people retiring with £500,000:

Person A (all in pension): Takes £125,000 tax-free, then pays 20-40% on the rest as they draw income.

Person B (£300k pension + £200k ISA): Takes £75,000 tax-free from pension, draws pension income up to basic rate threshold, then draws from ISA tax-free.

Person B likely pays less tax over retirement, especially in years when they need larger withdrawals.

How Talk Through Wealth Helps

Model different contribution strategies and see the long-term impact:

• Compare pension-heavy vs ISA-heavy approaches
• See how tax relief now compares to tax-free withdrawals later
• Model optimal withdrawal sequencing in retirement
• Factor in State Pension and tax band interactions
• Adjust as your income and circumstances change