ISA cash to pension pot

Justso65

Hi

I have read that it's possibly advantageous to put as much as you can, within contribution limits, from an ISA into a pension assuming you don't need the money until retirement.  A figure of 6.25% is commonly mentioned as the benefit in doing this.

Here is my calculation

At pension time I withdraw 25% tax free which is £3125 of the 10K

I am left with £9375 which is taxable at the marginal rate.

Of that I pay 20% tax and am left with £7500.

Add my £3125 and I effectively get £10625 out.

Assuming this is correct, and it ties in with the 6.25% figure, then if I was aiming to retire next financial year would it be sensible to fill the gap between my current contributions

and my salary then do as above to get the 6.25% benefit.

I currently earn circa 58K and put 23K into my pension including employer contributions.  So I assume I could potentially top up a pension with £35K potentially gaining £2187.50.

I have ISA savings that could contribute more than that so could I go back a year or more with back dated payments.

So my intention would be to do this in the current financial year and retire immediately the next financial year begins.

Excuse my naivety if that's the case.  Any comments are appreciated.

Justso65

My calculation should have starting by saying I am working with an example of moving 10K from ISA to pension.

MX5huggy

Yes you are on the right track your contribution limit is your salary this year presuming you have unused allowance from last year that you can use but even if the the full £40k from last year was available you can’t put in more than this years earnings. 

You need to find a platform to put the pension with and consider the fees, maybe your existing ISA or pension provider. Vanguard would charge you 0.15% per year so if you moved the money in to it in March and out in April it would be pocket change levels. 

AlanP_2

At pension time I withdraw 25% tax free which is £3125 of the 10K
I am left with £9375 which is taxable at the marginal rate.
Of that I pay 20% tax and am left with £7500.
Add my £3125 and I effectively get £10625 out.

I don't follow your numbers?

£10k pension pot

25% TFLS = £2,500

Taxable = £7,500

Tax Paid = £1,500


Net = £6000 + £2,500 = £8,500 (Note, this is an effective tax rate of 15% which is a quicker calculation).


But your £10k pension contribution only cost you £8k of your cash so yes a 6.25% gain assuming BR tax in and BR tax out.


If you were going to add £10k to your pension rework based on a £12.5k pension pot 

Alexland

Justso65 said:

My calculation should have starting by saying I am working with an example of moving 10K from ISA to pension.

If your employer operates salary sacrifice to avoid the national insurance on pension contributions it would be more efficient to contribute a higher percentage into your workplace pension from your remaining future earnings (being careful not to go below minimum wage in any pay period) even if that means spending down the equivalent ISA money on living expenses.

Justso65

AlanP

Apologies, I’ve written my description badly.  What I meant was put 10k into a SIPP and benefit from the government top up to £12500.

Withdraw 25% of £12500 as a TFLS = £3125.  £9375 left in pot.
Withdraw the remainder at taxable at 20%.  80% of £9375 = £7500
Total out after tax and TFLS = 3125 +7500 = £10625
So I believe I effectively get out £10625 for putting in £10k.

In fact, if I withdrew the £9375 left over after the TFLS so long as I remain under the starting tax point of around £12700 then all of it is tax free so I get out £12.5k for putting in £10k.

jamesd

Yes, the gain is 6.25% where contributions receive 20% tax relief and all but the 25% is taxed at 20% on the way out.

The benefit is quite often higher, for higher rate tax contributions and where the income tax personal allowance isn't otherwise fully used, so more of the pension pot is withdrawn with no actual tax cost.