Should you pick an Isa or a Sipp?

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 imposedby 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.

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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 kindof 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