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Stock market investing is a popular way to achieve early retirement. However, UK investors have a dilemma. Is a Stocks and Shares ISA the best place for a retirement portfolio, or is a Self-Invested Personal Pension (SIPP) better?
Here, I explain some merits and downsides of a Stocks and Shares ISA compared to a SIPP.
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.
Stocks and Shares ISA vs SIPP
To assess the relative strengths of a Stocks and Shares ISA and a SIPP, I’ll use four different criteria.
1) Tax relief: A SIPP’s central appeal is tax relief on contributions. For basic rate taxpayers, that’s 20%. This means an investor who contributes £100 to a SIPP will receive a £25 government boost, resulting in a £125 gross contribution. Regrettably, there’s no tax relief on Stocks and Shares ISA contributions. On this criterion, a SIPP wins.
2) Tax treatment: Investments held within ISAs and SIPPs are sheltered from capital gains tax and taxes on dividends. However, generally only 25% of a SIPP pot can be taken tax-free. The remainder’s treated as ordinary earnings by HMRC. Conversely, all Stocks and Shares ISA withdrawals are tax-free. Here, an ISA triumphs.
3) Flexibility: A big downside of a SIPP is investors can’t access their money until they reach 55 (increasing to 57 in 2028). That’s a key consideration for those who want to quit work before that age. By contrast, ISA withdrawals have no such restrictions. It’s another ISA victory.
4) Investment options: Depending on the provider, investors can buy a wide range of stocks, funds, exchange-traded funds (ETFs), bonds, and real estate investment trusts (REITs) in either an ISA or a SIPP. A draw.
Choosing the right investments
On my scorecard, it’s a 2-1 win for a Stocks and Shares ISA. However, the tax relief from a SIPP is a huge bonus that shouldn’t be overlooked. For greater flexibility, I think it’s worth contributing to both, especially for those aiming to retire before their mid-50s.
But the most important consideration might not be the choice of wrapper. Rather, picking the right stocks to buy is perhaps the greatest factor in determining whether an investor can achieve their early retirement dreams. Tax relief won’t save a badly constructed portfolio. After all, investing in shares can destroy wealth, as well as create it.
With that in mind, one FTSE 100 stock worth considering is the London Stock Exchange Group (LSE:LSEG).
Although most famously associated with the stock exchange it owns, the group’s real growth potential is in financial data. Having bought Refinitiv in 2021, the data and analytics arm is now the company’s main revenue source.
Serving over 40,000 institutions in 190 countries, Refinitiv is deeply embedded in the world’s financial ecosystem. Plus, its subscription-based model provides the company with recurring revenue streams and good cash flow visibility.
However, this is an expensive stock with a forward price-to-earnings (P/E) ratio of 27.4. That’s higher than many UK shares. In addition, a worrying chorus of companies delisting from the London Stock Exchange distracts from success in the data arena.
Nevertheless, a blossoming 10-year partnership with Microsoft on cloud infrastructure solutions bolsters the investment case. When the world’s second-largest company is showing a keen interest, I think investors should too.
