Be tax-efficient

Saving in an ISA means you don't have to pay Income or Capital Gains Tax on your investments. This means you can keep a bit more of what you earn. It's also easy-to-access, so useful for all sorts of financial goals.

A Self-Invested Personal Pension, or SIPP, is typically for retirement, as you can't normally withdraw from a SIPP until you reach age 55 (57 from 2028). It comes with tax benefits when you pay in. And you can take 25% of your pension pot tax-free, as long as it's not more than £268,275, which is known as the lump sum allowance.

It's possible to save in both types of account. If you have any additional money that you'd like to invest tax-efficiently, one of the options you could consider is investing for a child in a Junior ISA and a Junior SIPP. 

Important information - Investing over 5+ years can help you build long-term savings. But invested money can fall in value too so you may get back less than you put in. SIPP/ISA eligibility and tax treatment depends on individual circumstances and tax rules may change. Withdrawals from a Junior ISA are not possible until the child reaches age 18. You cannot normally access money in a pension until age 55 (57 from 2028). This is not a personal recommendation for a specific investment. If you're not sure which investments are suitable for you, consult Fidelity's advisers or another authorised financial adviser.

The theory

If you don't contribute to a pension, you'll miss out on extra money the government gives you towards saving for retirement (otherwise known as pension tax relief). You'll also miss out on the opportunity of no UK tax on growth. You can make use of unused tax-relief from the previous three tax years if you have used up your tax-relief for the current tax year. View our Carry Forward guide here. And when it comes to taking an income from your pension, you can normally take up to 25% tax-free, as long as this amount is not higher than your remaining lump sum allowance.

How it works in practice

The government tops up any eligible contribution you make to a pension.

If you're a basic rate taxpayer and pay in £80, it's automatically topped up to £100 through tax relief.

If you're a higher or additional rate taxpayer, you can claim extra tax relief. This means a £100 contribution costs £60 for higher rate taxpayers, or £55 for additional rate taxpayers.

If you pay into a workplace pension, this extra tax relief is usually applied automatically through your payroll.

The theory

Use as many of your tax allowances as you can to build a tax-efficient pot of money.

You can put aside up to £20,000 into your ISA in the current tax year and pay no Income or Capital Gains Tax on your investments. You can contribute as much as you like to a pension, but you'll only receive tax relief on contributions up to 100% of your earnings each tax year, capped at £60,000 (this amount reduces if you earn over £260,000). This is known as the pension annual allowance. You can still pay into your pension even if you don't have an income.

How it works in practice

To show you the difference maxing out your ISA allowance might have on your savings - if you were in a position to do so - take a look at the chart below.

The orange line shows you'd have invested £353,760 if you'd maxed out your ISA since 1999. If you'd invested this money in the FTSE All-Share (assuming no charges), it would be worth £862,391, after 27 years - which is a total UK tax-free gain of £508,631.

This example is for illustrative purposes only. The value of investments can fall as well as rise, so you may get back less than you invest. Past performance is not a reliable indicator of future returns. The returns shown here does not take account of charges which would reduce these amounts.