If you’re a UK resident and either a basic-rate or higher rate taxpayer, ISAs are a very attractive form of saving as any gain is free of both income and capital gains tax.
However, whilst ISAs are allowed to grow tax-free they do not offer tax relief on any contributions, which is such a key benefit for pension savings and why many people consider transferring their funds.
Can I transfer my cash ISA into a pension?
Cash ISAs would actually be the simplest type of ISA to transfer as they’re accessible immediately, whereas other forms of ISA – stocks and shares, innovative and lifetime – would require the sale of the underlying assets before a transfer could take place.
Should I transfer my ISA into a pension?
Whilst there’s no doubt the tax-relief benefit is a very enticing reason to switch your ISA funds into a pension, you also need to consider whether or not you would need access to the funds before you plan to retire.
Tax-relief, as mentioned above, is a major factor for switching out of an ISA and into a pension. If you’re a basic-rate taxpayer this means the UK government will make an additional contribution of 20% to your pension fund on your behalf.
High-rate and additional rate taxpayers can claim an extra 20% and 25%, respectively, through their self-assessment tax returns.
If a basic-rate taxpayer transfers £10,000 from their ISA into a pension this amount would be classed as a net contribution meaning an additional £2,500 will be added to their pension fund. High-rate taxpayers can claim an extra £4,167 and additional taxpayers can claim an extra £5,681.
Pensions are a much more tax-efficient way to save for your retirement. The tax-relief alone can make a significant difference to your retirement fund as it would be unrealistic to expect the capital growth from an ISA to match this amount.
Other possible benefits of transferring your ISA funds into a pension are:
Inheritance Tax (IHT): Pension funds remain outside of your estate for IHT purposes whereas ISAs do not and could incur a 40% tax charge depending on who your beneficiaries are and the size of your estate upon your death.
Annual allowance: The total amount you can save into an ISA is £20,000 in the current tax year (2019/20). For a pension you can contribute up to a maximum of £40,000 or the equivalent of your annual salary whichever is lower.
The main disadvantage of transferring your ISA into a pension is the lack of flexibility and access you then have to these funds.
With an ISA you can withdraw funds whenever you wish, without penalty. However, with a pension, the earliest you can begin withdrawing money would be from 55 years of age.
If you would prefer a savings plan that gives you full access to all of your funds at any time, which can be withdrawn free of income and capital gains tax, an ISA account would likely be the most suitable option.
Other possible drawbacks of transferring your ISA funds into a pension are:
Tax on withdrawal: A pension fund only allows the first 25% to be withdrawn tax-free at retirement. All other withdrawals are subject to income tax at your marginal rate. All ISA withdrawals are free of income and capital gains tax.
Investment risk: Funds transferred into a pension rise or fall based on the performance of the underlying assets. ISAs offer a cash option which would not expose your savings to stockmarket volatility.
Deciding to transfer your ISA into a pension depends a lot on your personal circumstances. If you’re still not sure, make an enquiry and we can ask an expert to get in touch and speak with you.
How do I transfer my ISA into a pension?
A transfer between an ISA and a pension is not a direct transaction in the same way as when one pension fund is transferred to another. An ISA first needs to be cashed-in and placed in a current account, if it’s a non-cash version, before it can be transferred from there into your pension fund as a lump sum contribution.
The first thing you need to do is to inform your provider that your ISA, if invested in assets other than cash, needs to be liquidated.
You can then complete your lump-sum pension contribution by finalising all the relevant paperwork with your scheme administrator or pension provider.
It’s worth noting that your ISA funds will likely be in a cash position for a number of days during this process and outside of any stock market activity during this period.
Can I transfer my pension into an ISA?
When you reach normal retirement age (usually from 55 onwards), you have the option of withdrawing up to 25% of your pension fund tax-free. Once you’ve done this you’re free to invest these monies into an ISA if you wish.