Transferring a Pension into an ISA

Since the introduction of pension flexibility in 2015, more people are seizing the opportunity to transfer their pension funds into an ISA account to potentially get the most from their retirement savings.

We receive plenty of enquiries from customers looking to transfer their pension pot into an ISA. We’re often asked if it’s possible to transfer a pension into an individual savings account, whether it’s a good idea, and how to go about doing it.

If you’re considering moving your pension pot to an ISA or lifetime ISA (LISA) and any of these questions ring true for you, you’ve come to the right place. Read on, where we’ll be covering:

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Can I transfer my pension to an ISA?

Although transferring funds directly from a pension to an ISA is not typically permitted, provided it is defined contribution (DC) pension scheme, you are likely able to withdraw your funds from the age of 55 and move them to another product, such as an ISA.

You can do this with a defined benefit pension (DB), though you may find the process more complicated without guidance from an expert.

You are then free to invest this in an ISA if you wish, but it’s important to bear in mind the tax implications and other risks associated with draining your pension pot in favour of another scheme.

You can take out up to 25% tax-free from a defined contribution pension, but if you decide to withdraw the whole pot, the remaining 75% will be subject to income tax.

Should I transfer my pension pot into an ISA?

The amount you can save into an ISA – where capital growth and withdrawals are tax-free – has increased so that you can (at the time of writing) deposit up to £20,000 each tax year, making it a tempting option to transfer your pension into.

However, there are very few circumstances in which withdrawing your entire pension pot to invest in ISA(s) is appropriate, but a combination of the two could be a financially viable option.

Read on to find out more…

Income Tax

When organising your retirement income, your main goal should be to withdraw what you need while creating the smallest income tax bill possible. Everyone has a personal allowance, which is currently set at £12,500. By cleverly balancing a pension and ISA, you may be able to earn more than the personal allowance before you are charged.

Imagine that you have previously invested half of your 25% tax-free pension into an ISA. If you receive the maximum State Pension of £8,757 a year, £3,743 of your Personal Allowance is remaining before you owe any tax.

If you then withdraw an additional lump sum from your DC pension (within the 25% allowance), for example £6,000, then £3,743 of it would count against your remaining Personal Allowance, and the additional £2,257 will be tax-free anyway.

Balancing ISA and pension income can be advantageous if your income is likely to push you into a higher tax bracket. By making the most of both schemes, you may be able to delay when you start using your taxable pension income.

Inheritance Tax

ISAs and pensions are very different beasts when it comes to how the funds are passed on after you’ve passed away.

ISA money can only be inherited tax-free by a spouse of a civil partner – anything beyond that will typically fall within your estate for Inheritance Tax purposes.

When it comes to pensions, however, if you die before the age of 75, your funds can be passed on tax-free to anyone you want. As this money isn’t generally part of your estate, no inheritance tax is payable.

If you are considering transferring your pension to an ISA, it is strongly advised to seek professional advice. Get in touch today to speak to a pensions expert.

Can I transfer my pension into a lifetime ISA?

A lifetime ISA (LISA) allows those aged between 18 and 39 to pay in up to £4,000 a year, and the government will contribute a potential 25% on top. This stops when you turn 50, then the funds can be used towards retirement savings, which you can access at the age of 60. All LISA withdrawals are tax-free.

If you’re looking to transfer your pension into a LISA in the hope that it will grow your funds, this is not a viable option. Considering that you’re unable to legally access your pension pot until age 55, you will no longer be eligible for the government bonus.

However, as with standard individual savings accounts, the funds from an existing LISA may be leveraged alongside your pension to help minimise the amount of income tax you have to pay.

How to transfer a pension fund to an ISA or LISA

If you decide to transfer some or all of your pension pot into any type of ISA, you will need to contact your pension provider and check that your existing scheme allows you to transfer funds.

You should also seek professional advice. The independent pensions experts we work with can guide you through the process and offer bespoke advice every step of the way, so make an enquiry here to get the ball rolling on your transfer.

As you are unable to move funds directly to an ISA, you will need to arrange for the funds to be temporarily transferred to an alternative account. Depending on the provider, this can take a matter of days or weeks to process.

Once you have withdrawn the funds, you can then proceed to transfer them into your chosen ISA.

Speak to a pensions expert about your ISA transfer

Before making any decisions when it comes to transferring your pension ISA, it’s always advisable to speak to an expert if you want the most beneficial financial outcome.

The specialists we work with can provide you with the most up to date advice, tailored specifically to your circumstances.

Give us a call on 0808 189 0463, or contact make an enquiry to arrange a no-obligation chat with a member of the team.

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

Tony has worked in a vastly diverse array of areas in the pensions industry for over 2 decades. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events. Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been "Hope for the best, but PLAN for the worst", and believes that the biggest impact that an adviser can have on a client's life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they WANT their retirement to be.

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