Ever wondered whether there is any difference between using a Stocks and Shares ISA and a SIPP, when it comes to trying to build wealth over the long term through investing in the stock market?
There is.
In fact there is more than one difference that can mean a SIPP helps someone build wealth faster than an ISA, presuming they invest exactly the same amount in the same shares.
But building wealth is only one side of this story. There is also the question of using it. There, the Stocks and Shares ISA can offer some advantages a SIPP may not.
2 reasons to use a SIPP
The main reason I think a SIPP allows for faster wealth building is because it offers the prospect of ‘free money’.
The reason is simple. A Stocks and Shares ISA does not offer tax relief. So the amount of money you put in is the amount you are able to invest.
By contrast, a SIPP offers tax relief. That means that for every £1 you put in, you can invest £1.25. For higher and additional rate income tax payers, the tax relief is ever bigger.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
So, all other things being equal, making the same moves in a SIPP creates more wealth than it would in a Stocks and Shares ISA.
A second reason is that you can contribute three times as much to a SIPP in one tax year (£60k) as you can to a Stocks and Shares ISA (£20k).
But using the wealth is a different thing…
However, building wealth is one thing, but what about the day when you want to do something with it?
Someone can dip into their ISA at any point. But they cannot take a penny out of their SIPP until 55 (and that is set to rise to 57).
Dividends and capital gains are untaxed inside both platforms. But while they can be taken out an ISA tax-free, there is a tax-free allowance for SIPP withdrawals that currently is only 25%.
Above that, withdrawals are subject to tax rules that basically mean they are treated as income and so may be liable to income tax.
Both approaches have merits
My approach is to have both an ISA and a SIPP. I see strengths and weaknesses to both platform structures.
One share I own in my SIPP for both its growth and income prospects is baker Greggs (LSE: GRG).
The share yields 4.4% today. I am optimistic that the dividend can grow over time if Greggs’ ongoing revenue growth can be translated into profit growth.
That could also push up the share price in my view. It has fallen by two-fifths over the past five years.
That reflects investor concerns about the company’s costly programme of opening new stores eating into profitability.
War in the Middle East also threatens to add inflation in ingredient and energy costs to Greggs’ headaches, on top of increases in wage and National Insurance costs in recent years.
But the company has a proven, focused business model. Economies of scale help support its compelling value proposition for customers.
With its strong brand and ongoing growth plans, I reckon Greggs is undervalued and worth considering.
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Christopher Ruane owns shares in Greggs.
