Transferring money out of S&S ISA

ViolaLass

This is sort of a retirement question but I think it more relevant to this board. Please ask for it to be moved if you disagree.

Let's say that I am saving for retirement by putting money in a S&S ISA, not a pension and I calculate that I will have a lump sum of £200k in the end (the figure itself is not important except that it's a lot bigger than £5100). In the years coming up to retirement, I want to move this money from the S&S ISA to a normal cash account so that I can lock in any gains and have a stable income.

Naturally I would want to avoid paying tax if possible, indeed that is the point of the ISA but I don't see how I can do it. If I transfer £5100 a year, it will take a long time to transfer the whole lump sum and I would either have to start well before retirement or continue well into it which might be risky.

I believe you can't transfer a S&S ISA directly and wholly into a cash ISA so what so I do?

Thanks in advance for any advice.

smallfry27

You could use NSandI Index-linked certificates and pay £15k into the 3 year option and £15k into the 5 year option. The interest is based on RPI + 1%, so you will always preserve the buying power of your money. And completely tax-free. There is plenty of discussion about them on other threads. These are the maximums that you can pay into each 'issue', but there is usually a new issue each year.

noh

I am doing something similar in so far as I am contributing the maximum to my S+S ISA.
I don't plan to remove the capital from the ISA on retirement.
I will start to withdraw the income when I need it.
To maximise the income my investments within the ISA are largely in fixed interest funds.

Primrose

I don't see that you necessarily have to withdraw money from your equity ISAs to fund a monthly income in retirement although I can understand your anxiety that with the stockmarket being volatile, there's no way that you can guarantee the security of your assets. I assume that at the moment you're having all the income/dividends reinvested, and possibly some of your funds are growth funds in various sectors rather than income funds.

When you get close to retirement, it's a case of rearranging your portfolio so that you probably move to a different type of funds, i.e. equity income and fixed interest funds, where you arrange for the interest/dividends to be paid out, rather than reinvested.

I haven't got to the stage yet where I want to draw an income from my equity ISAs although that day is getting closer. I haven't investigated the fine detail yet, but because funds pay out dividends on different dates I imagine that income will not come in a steady regularly monthly interest stream as it would from a fixed rate bank or building society bond, but rather on different quarterly dates, according to when the different funds pay out. Perhaps somebody can clarify this? But at least this income will be tax free and you won't have to account for it on an annual tax return.

If you had a very large fund, you could, of course, withdraw a sum every year and put it into NS&I to keep it tax free but then you would only get a tax free interest from it every 3 or 5 years when the certificates mature, which would probably not suit your need for a regular monthly income. Or of course, you could take out a savings bond which paid monthly interest but it would seem a pity that having saved hard over the years to build up a tax free sum, you would then destroy it by switching money into a taxable product. However, you could use a combination of both withdrawals and taking monthly income from your equities if you want to keep your retirement income tax free. Somebody else on here may have some other ideas as to how you could manage it.

dunstonh

In the years coming up to retirement, I want to move this money from the S&S ISA to a normal cash account so that I can lock in any gains and have a stable income.

Thats a bit extreme and unlikely to be the best option. It negates the reason for using an ISA instead of a pension as well.

I believe you can't transfer a S&S ISA directly and wholly into a cash ISA so what so I do?

Change the investments to meet your objectives. No need to close the ISA.

ViolaLass

dunstonh wrote: »

Thats a bit extreme and unlikely to be the best option. It negates the reason for using an ISA instead of a pension as well.

My aim in retirement is to live off the interest and the capital, running the capital down like a reverse mortgage. Otherwise, as I see, I may as well buy an annuity (ignoring issues of inheritance, which I am not concerned about).

I don't buy that it's necessarily not the best option - moving the money from S&S ISAs to cash ISAs, were it possible, would allow me to lock in the gains made and pose no further risk to the capital, whilst knowing how much I would have to live off each year.

For me, the reason for using an ISA is to have access to the money in the mean time, should I need it, as I am self employed, and also because, at this point in time, I am uncomfortable with the idea of a pension. How would this be negated by my proposal?

Primrose

The only problem with running the capital down is that none of us know how long we're going to have to make that capital last. For some of the population it could mean living to age 100 and if you're one of these people have been drawing down your capital and putting it into savings which are not inflation proofed, your last years could be lived in more penury than you had planned. I do accept though, that a stock market dip at that stage in your life could lead to similar problems. It's a case of "you're damned if you do, and you're damned if you don't" and I'm not sure there is a guaranteed 100% proof solution.

ViolaLass

Primrose wrote: »

The only problem with running the capital down is that none of us know how long we're going to have to make that capital last.

True and especially true given the genes I have inherited. However, I was planning on picking a number that I would be extremely unlikely to live until e.g. 115 and working accordingly. I don't plan to use up ALL the capital before dying, I just don't see the point in not using some of it.

As you say, a stock market dip could have the same effect and that is what I am concerned about (if I'm spending too much, I can do something about that but I can't control what the market does). The same has happened to my mother-in-law during the last dip and she was reliant on credit cards over the winter. Admittedly, this is because she isn't great with money but it got me thinking.

dunstonh

My aim in retirement is to live off the interest and the capital, running the capital down like a reverse mortgage. Otherwise, as I see, I may as well buy an annuity (ignoring issues of inheritance, which I am not concerned about).

Ignoring all growth, the rate of return on the income versus capital paid in is around 9% a year on a pension. Where can you get 9% a year on a savings account?

I don't buy that it's necessarily not the best option - moving the money from S&S ISAs to cash ISAs, were it possible, would allow me to lock in the gains made and pose no further risk to the capital, whilst knowing how much I would have to live off each year.

Why not go with fixed interest securities and other yielding investments in the ISA and live off the yield. The yield would be tax free, higher than savings and whilst there would be some fluctuation, the level tends to be relatively mild. Rebalance it periodically (including cash) and you end up with a much better situation.

For me, the reason for using an ISA is to have access to the money in the mean time, should I need it, as I am self employed,

As you are self employed that also means you get less state pensions. Have you factored that into the equation?

How would this be negated by my proposal?

Your option is inefficient for tax, will provide a low return, will suffer capital erosion due to inflation and potentially leave you with no money before you die.

As you say, a stock market dip could have the same effect and that is what I am concerned about

Why are you just looking at the two extremes. ie.. cash and equities. On a risk scale of 1-10 thats like saying that risk 1 and risk 7 are the only options available to you. What about all the things in between?

ViolaLass

dunstonh, thank you very much for your reply, very useful and it has given me food for thought.

All I can say for now is that I am counting on receiving no state pension at all as it is a long way away and who knows what will change in the mean time. That way, anything I do get will be a bonus.

jamesd

ViolaLass, you can cover a stock market dip by having a year or two of income in a savings account. Dividends and interest from the investments top that savings account up. Monthly payments from it to your current account provide your regular and predictable income. Possibly deliberately draw down some capital once a year into the savings account in good times.

A market dip would have to reduce interest and dividends so much that over several years they cause the savings account balance to fall to zero and that's not likely, even if they were to halve, it would take four years before a two year's total spending buffer ran down the savings account to zero. And halving of income is very unlikely, usually it's capital that varies most.

Now you have the regular income secured you can largely ignore the effects of capital value movements and moderate changes in income from the investments. So you can stay invested in equity income funds, corporate bonds and whatever else you use and take the higher income that they provide.

The pension or ISA choice is interesting. The S&S ISA initially has the advantage because you can draw on it for income before you are 55. That's your protection against injury or whatever else that ends your working life very early, or an opportunity for early retirement if you do very well.

Once you have your minimum income taken care of inside the ISA and can maintain it until you reach 55, the tax advantage of the pension starts to become more interesting. The tax relief going in and assuming you're higher rate tax payer now and basic rate in retirement, the lower tax taking the income out. Or for any tax rate, the initial 0% tax band via the personal allowance for about £10,000 of income.

Since you're self employed you can recon on about £5,000 a year in basic state pension and another £5,000 at 0% income tax for other pension income. At 6% income from investments, that £5,000 would take £83,000 to generate, at 4%, £125,000. 6% isn't unreasonable for long term income not drawing on capital and growing with inflation, 4% is a good safety margin.

So you get a multi-part challenge:

1. S&S ISA to provide income with heavy capital drawing until you can take pension income at age 55.
2. Pension starts, you can take a 25% lump sum and some income, how much may change. Draw on this at a higher than sustainable rate until the state pensions start at state retirement age, say 68.
3. Now state pensions start and you need to take an income that is sustainable until say age 110.

Part 1 is the toughest but gets easier as you get older. It suggests that the S&S ISA is the primary initial method to use. Once you can live on the ISA until age 55 you can start looking at the pension to start to exploit that £10,000 of 0% tax band.

Contribution limits on pensions may make it necessary to put money into the pension even before you can pass the part 1 test. Getting higher rate tax relief only on higher rate income may also make it a good idea to compromise on 1 to get the higher rate relief each year, since you can't put in more at higher rate relief than the amount you make each year that you'd pay higher rate tax on.