ISA or SIPP: where should the money go first?
A SIPP gives you tax relief now and taxes you later. An ISA taxes you now and never again. The question is which rate is higher.
Choose a wrapper for a reason rather than a rumour. (Information, not advice. A tax adviser is worth the money.)
How ISA or SIPP: where should the money go first? works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
What a 2% fee costs over thirty years
Both lines earn the same 8%. One pays 0.07% a year, the other pays 2%. The gap is not a rounding error, it is most of the point of the exercise.
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Both remove tax on growth. That is the big win, and it is shared
Inside either wrapper, dividends and capital gains are not taxed. Over decades that is an enormous, certain improvement to your returns, and it requires no skill whatsoever. Getting your money inside a wrapper matters far more than which wrapper you choose.
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The SIPP: relief now, tax later, locked up
Contributions get tax relief at your marginal rate, so a higher-rate taxpayer gets a substantial uplift on the way in. On the way out, most of it is taxed as income. And you cannot touch it until the minimum pension age.
The relief is the point. If you are paying a high rate now and expect a lower rate in retirement, that arbitrage is where the money is.
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The ISA: taxed going in, free forever after, and yours
No relief on the way in, no tax on the way out, and no age lock. Flexibility is the feature. If you might need the money before retirement, this is not a preference, it is a requirement.
The lock on a pension is a feature as well as a cost. Money you cannot reach is money you cannot panic-sell.
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And check for free money before either
If an employer matches pension contributions, that match is an instant, guaranteed return that no investment can compete with. Take it in full before optimising anything else.
You can say which rate you pay now and which you expect in retirement, and why that settles it.
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A SIPP gives you tax relief now and taxes you later. An ISA taxes you now and never again. The question is which rate is higher.
The returns you keep are the only ones that count, and the wrapper does more for them than most stock picks ever will.