SIPPs and ISAs both hold advantages over one another as well as disadvantages. They key difference to take into consideration is that an ISA allows the access of money at any time, whereas funds held within a SIPP are locked until the investor reaches 55 years old.
A key benefit of a SIPP versus an ISA is the generous contribution the government makes when an investor adds funds to their pension (20 percent for basic-rate taxpayers of 40 percent for higher-rate taxpayers). ISAs do not have this contribution benefit, but they do allow withdrawals to occur tax-free. This is different to a SIPP, whereby a 25% lump-sum can be taken tax free at the age of 55 and future withdrawals are subject to tax.
Overall, SIPPs are generally viewed as more tax efficient, particularly for those who are higher-rate earners.
Although a futher disadvantage of a SIPP are the administration costs associated with one – however, this can be relatively minor in the grand scheme of things.
So what one is best? Perhaps the answer is both. The SIPP with its generous contributions could work out better in the long-run, but ISAs are more flexible and allow for withdrawals at anytime as and when needed. Therefore, utilising both will allow investors to most efficiently prepare their finances for whatever life throws at them in the mid-term as well as fully enjoy retirement in the long-term.