Moving ISA to Pension: technical issues?

FatherAbraham

Currently I'm salexing about £24k a year into my pension, with eight years until my desired retirement age (I'm 52). From a employment-income perspective, this level of contribution really hurts, and there's not much scope for increasing it further.

However, each year I'm wasting up to £16k of pension-contribution income-tax deferral ("tax relief") and salex-related National-Insurance avoidance.

I have somewhat more than £125k in an equity ISA, and it occurs me that it would be more tax-efficient to increase my pension-contribution salex by another £16k a year or so, and deal with my income shortfall by consuming the net reduction in my take-home pay from the ISA. At 20% income tax and 12% NI, that's probably about £10,900 a year.

In other words, I gradually move funds in the ISA over the pension fund, where they'll probably be income taxed at 15% on withdrawal, taking a 25% tax-free commencement sum into account.

Have I overlooked any practical considerations in my transfer strategy? Clearly, I gradually lose access to the ISA funds, but not very quickly, and those funds are really not for anything specific. At this rate of withdrawal, my outstanding mortgage (£70k at 0.95% for another twelve years; the capital outstanding is currently taking at about £5k a year) will always be covered by my ISA funds.

What have I overlooked?

Bimbly

You will need the ISA money to live on from 52 until you can access your pension.

Pension pots (DC) can currently be accessed at 55. At some point this is due to rise to 10 years before state pension age -- will this affect you?

Dazed_and_confused

You seem to be contradicting yourself.

At one point you are contributing more out of wages (to get tax and NI relief by virtue of the lower wage).

But later you say

In other words, I gradually move funds in the ISA over the pension fund

Bit lost as to what you are actually doing as money paid from ISA into personal pension or SIPP would attract basic rate tax relief (added to the pension fund) but no NI relief at all.

FatherAbraham

Bimbly wrote: »

You will need the ISA money to live on from 52 until you can access your pension.

Pension pots (DC) can currently be accessed at 55. At some point this is due to rise to 10 years before state pension age -- will this affect you?

As it says in the first sentence of the post, I'm 52. I intend to retire in eight years' time. That's 60 years of age.

FatherAbraham

Dazed_and_confused wrote: »

You seem to be contradicting yourself.

At one point you are contributing more out of wages (to get tax and NI relief by virtue of the lower wage).

But later you say


Bit lost as to what you are actually doing as money paid from ISA into personal pension or SIPP would attract basic rate tax relief (added to the pension fund) but no NI relief at all.

I intend to increase my sales contributions to a level which would normally be unsustainable, in order to get maximum Income-tax and NI relief.

I compensate for the take-home pay shortfall by withdrawing an equivalent amount from the ISA, to pay living expenses.

The net effect is to transfer capital from the ISA into the pension arrangement via salary sacrifice.

Dazed_and_confused

Ok, so you aren't actually putting the ISA into a pension, you are living off it.

Given this comment in your original post are you going to fall foul of the NMW/living wage implications?

From a employment-income perspective, this level of contribution really hurts, and there's not much scope for increasing it further.

Aiki

Firstly i would suggest you edit your initial post to be clear that you will be withdrawing funds from your ISA to make up the shortfall for your increased pension contributions.

Seems like a great idea to me, wish I had thought about it whilst I was still working.

An ISA allows more freedom of access to the money, whereas a pension you cannot touch until 55 at the earliest and then depending on the pension type you may have decisions to make on when and how to access it. But in your case you are making use of this additional flexibilty to access the ISA so go you.

What are the costs of the pension compared to the ISA and what are the options for the investment.
Overall seems like a nice idea in my humble opinion and you can stop doing it at anytime and go back to 'normal' contributions.

dunstonh

Pension trumps ISA as long as you are not going to be a higher rate band in retirement than you are in your working life. (caveats on age of commencement etc but looking at pure financials)

It is not uncommon to move ISA funds into a pension to get the tax relief.

If you have a gap before state pension age where you will have a number of years of personal allowance to use up, a pension is massively better than ISA. Even if you have no personal allowance left over, pension still beats ISA.

Snakey

I can't see anything wrong with it. Assume you have ruled out NMW and LTA issues and are sure you won't be looking at a higher rate of tax in retirement (of course there's always a risk that "basic rate" will go up). Health problems/unemployment between now and age 55 wouldn't be the end of the world given the timescale and the numbers you've mentioned.

Due to the relatively short timescale you'd hope to be safe from political risks such as abolition of PCLS, massive reduction in LTA, increase in pension access age and so on. (And if we're accepting the possibility of sudden and dramatic changes, it's just as likely that the tax-free status of ISAs could be withdrawn).

As you say, you can always stop doing it if something changes.

Have you also thought about increasing the contributions further (NMW permitting) to use up AA from earlier years?

I'm sure you are on the ball with this, but if you are skating up to annual limits don't forget to include employer contributions/uplifts in your calculations, especially the impact of in-year pay rises on employer contributions.

Increasing your income (and increasing the salsac pound for pound) would be better than depleting your ISA. With eight years to go you have time to obtain further qualifications, push for promotion, move to a better job etc. Appreciate this is often easier said than done, but I'm surprised sometimes to find people literally haven't even thought of it - they see retirement on the horizon and narrow their focus without realising.

Albermarle

If you have a gap before state pension age where you will have a number of years of personal allowance to use up, a pension is massively better than ISA. Even if you have no personal allowance left over, pension still beats ISA.

Just to hijack the thread a little bit. I have seen recommendations in other threads to do the opposite and move pension money to ISA's ( by taking tax free cash early/annually) to help to avoid potential LTA issues later . Presume this is because future growth in that ISA money will not contribute to LTA .
So if you had a potential LTA issue ( but it was not for sure ) it seems like it could be a 50:50 decision whether to do this or not ?

LHW99

Just to hijack the thread a little bit. I have seen recommendations in other threads to do the opposite and move pension money to ISA's ( by taking tax free cash early/annually) to help to avoid potential LTA issues later . Presume this is because future growth in that ISA money will not contribute to LTA .
So if you had a potential LTA issue ( but it was not for sure ) it seems like it could be a 50:50 decision whether to do this or not ?

Provided you were over 55