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 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.
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 balancing a pension and ISA, you may be able to earn more than the personal allowance before you are charged.
If 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.
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.
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.
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.