The choice between saving into an Isa or a personal pension used to be a trade-off between flexibility and tax breaks. Isas give you maximum flexibility: you can take your money out when you want (subject to any restrictions imposed
by your provider).
Pensions give you generous up-front tax relief on your contributions – but your money is completely locked away until you reach the age of 55. Thereafter, most people are subject to limits on how much they can take each year.
The new pension rules coming into effect on 6 April will greatly change that compromise. You still won’t be able to access your pension until you’re 55, but you will then be able to draw on it however you want. That could even include taking the whole lot as an immediate lump sum (although doing this will be a bad idea for most people – taking smaller amounts over time will often mean you pay less tax). In addition, pensions can now be passed on to your descendants without them having to pay inheritance tax.
Given this, it’s no surprise that many people think the balance has swung firmly in favour of pensions. However, we’re not entirely convinced. There’s no doubt the new rules are very generous – but that’s the problem. They may be too generous to last. Politicians have a long history of continually tampering with the pension system and they show no signs of stopping with this set of changes. There is no assurance that the rules in 30 years’ time will look as they do today.
So if you’re planning to retire in the next few years, a pension may now be a better bet than an Isa – but younger investors might want to be a bit more cautious about tying up money for decades.
That said, if you’ve already used up your Isa allowance for the year – or if you’ve got old pension plans with a limited range of investment options that you’d like to be able to manage more freely – a self-invested personal pension (Sipp) is worth considering.
A Sipp is a pension plan where you make all the investment decisions. Sipps can theoretically hold almost any kind
of investment, but the most flexible ones (known as “full Sipps”) tend to have very high fees. Those available through brokers – known as “platform Sipps” – usually let you hold a similar range of investments to Isas.
You can currently contribute up to £40,000 gross to a Sipp in each tax year, subject to earning at least as much as you want to contribute. Basic-rate taxpayers make their contribution out of after-tax pay, and HMRC pays the tax relief straight into the Sipp.
For high-rate and top-rate taxpayers, part of the tax relief is paid back into the Sipp and part needs to be reclaimed from HMRC, usually via your self-assessment form (many people don’t do this and end up not getting all the tax relief they are due – try to avoid being one of them).
Sipps are generally more expensive than Isas, due to the higher administration cost for providers. In the table below, we’ve listed some of the most competitive Sipps currently available.
Five of the best Sipps
|Cavendish Online||0.25% of portfolio value per year for funds. Stocks not available||The percentage-based fund custody fee and no Sipp administration fee means that Cavendish is probably the cheapest option for a funds-only Sipp.|
|iWeb Share Dealing||£22.50 per quarter under £50,000, £45 per quarter above. £5 per trade||A relatively low administration fee, no funds custody charges and low trading fees makes iWeb very good value for both funds and shares.|
|AJ Bell Youinvest||£5 per quarter under £10,000, £15 per quarter £10,000 to £20,000, £25 per quarter above £20,000. Fund charge (OEICs and unit trusts): 0.20% per annum (max £200 per year). £4.95 per trade for funds. £9.95 per trade for stocks||The tiered Sipp administration fee makes Youinvest one of the cheapest choices for stock-based Sipps of all sizes. Good value for international stocks, although very active traders may do better with a provider that allows you to hold foreign currency. The range of funds is wide and fund charges are reasonable.|
|iDealing + EPML||£5 per quarter account fee plus £200+VAT per year Sipp administration fee. £9.90 per trade||iDealing allows the use of several different Sipp administrators, of which EPML is probably the cheapest. It’s particularly useful for those who want the ability to trade a wide range of assets including derivatives in their Sipp (other alternatives for this include Interactive Brokers and Saxo Capital Markets).|
|X-O||£95+VAT per year. £5.95 per trade||X-O’s Sipp has a fairly low annual fee and makes no other charges for withdrawals at retirement. That could make it attractive for those expecting to retire soon. Only UK stocks, investment trusts and ETFs are available.|