Shifting money from ISA into pension when approaching / during retirement

MetManMark

Morning all

I am 47 and starting to think about my plan regarding retirement. I have a DB civil service that will provide some income at 60 and some more income when the state pension kicks in (ie both PREMIUM and alpha).

I have been saving into a SIPP (to help cover the time between 60 and state pension age) and also into ISAs. Initially I focused on maxing out my ISAs but more recently as my salary has crept over £50k I have been paying more into my SIPP in order to avoid losing chold care benefit. I also have some bonds from some time ago although I haven't been adding to this pot of late.

I plan to retire at 61 as at that stage I will have maxed out my number of NI years. My question is what my plan should be as I move to the last few years of working and how best to manage my various investments. I'll continue to pay into both ISAs and my pension. But would there be value in moving more of my existing investments into my pension?

My thinking is that I will get tax relief when I pay into my pension and then I'll also get 25% tax free when I take it out. So I will get double benefits from it. The reason that I was happy to pay into ISAs was because I could access it at any time but as I get to 55 or 58 I'll be able to access my pension anyway so that benefit is lost.

I was also initially cautious about paying too much into my pension due to the lifetime allowance, but given that this has been removed this takes away one of the drawbacks of investing more in the SIPP approach. 

Is there a standard approach to this? Essentially I am thinking that rather than just drawing upon my ISAs I might draw the money out of ISAs and route it through the pension rather than just taking it directly. Does that make sense?

My ISAs are stocks and shares and my pension is a more simple tracker.
Thanks in advance
Mark

Linton

You say that you will have “maxed out” your NI at 61.  Have you checked this? See https://www.gov.uk/check-state-pension

People posting here quite often assume that 35 years NI gives them a full state pension. This may well not be the case if you were contracted out of SERPS as a member of a DB pension scheme.

Under some circumstances  S&S ISAs can have advantages over a pension, for example if you would be a higher rate taxpayer in retirement or wish to shelter or cash-in a large lump sum at some point. Also they are more convenient if you were wanting to take ongoing income from dividends or interest.

cloud_dog

If moving money from the ISA in to the pension fits with your overall needs and goals, e.g. loss of flexibility in accessing your ISA money if required, then it does make sense to maximise the efficiency of using up the HRT monies and using the ISA to support this.

I am much closer to my R-Date, possibly another 15+ months, but have been doing pretty much this for a number of years now.  It started off years ago with aiming to keep my adjusted net income at the £50k / CB level, but it then migrated to retirement planning.  I benefit from Salary Sacrifice so each year I sacrifice down to the NMW (or nearly), and because I benefit from SS I use the workplace scheme to undertake all this. 

Each year I sell an amount of investments out of the ISA and put it in a savings account, where I draw 1/12th each month to supplement my reduced take home pay.  Obviously I work it this way as I am contributing the majority of my salary each year, not just down to the £50k level, although the principle is the same.

MetManMark

Linton said:

You say that you will have “maxed out” your NI at 61.  Have you checked this? See https://www.gov.uk/check-state-pension

People posting here quite often assume that 35 years NI gives them a full state pension. This may well not be the case if you were contracted out of SERPS as a member of a DB pension scheme.

Under some circumstances  S&S ISAs can have advantages over a pension, for example if you would be a higher rate taxpayer in retirement or wish to shelter or cash-in a large lump sum at some point. Also they are more convenient if you were wanting to take ongoing income from dividends or interest.

Thanks @Linton.Unfortunately I don't think I'll be a higher rate tax payer once retired . I have double checked the NI situation as some of my pension was "contracted out". What I have said I *think* is correct in terms of retirement age . It is still a long time off but thought I should start thinking about it more seriously now...

M

MetManMark

cloud_dog said:

If moving money from the ISA in to the pension fits with your overall needs and goals, e.g. loss of flexibility in accessing your ISA money if required, then it does make sense to maximise the efficiency of using up the HRT monies and using the ISA to support this.

I am much closer to my R-Date, possibly another 15+ months, but have been doing pretty much this for a number of years now.  It started off years ago with aiming to keep my adjusted net income at the £50k / CB level, but it then migrated to retirement planning.  I benefit from Salary Sacrifice so each year I sacrifice down to the NMW (or nearly), and because I benefit from SS I use the workplace scheme to undertake all this. 

Each year I sell an amount of investments out of the ISA and put it in a savings account, where I draw 1/12th each month to supplement my reduced take home pay.  Obviously I work it this way as I am contributing the majority of my salary each year, not just down to the £50k level, although the principle is the same.

Thanks @cloud_dog. I am still in the civil service pension (plus a SIPP). So unfortunately no salary sacrifice for me. Could I just ask what NMW means? Sorry - I am probably being daft! But good to hear that my logic isn't totally flawed. I don't think I will actively sell ISAs to boost my SIPP although I will probably start putting a greater share of my pay into the SIPP and perhaps move across the bonds that I have (if I can).
M

Dazed_and_C0nfused

NMW = national minimum wage

MetManMark

Thank you @Dazed_and_C0nfused

QrizB

MetManMark said:

It is still a long time off but thought I should start thinking about it more seriously now...

I'm a few years older than you, and hoping to retire slightly younger than you are, but 47 to 61 is not as long a time as it sounds! You're quite right to start planning now.

MetManMark said:

I plan to retire at 61 as at that stage I will have maxed out my number of NI years.

Is that the only reason why you've chosen 61 as your target? It's relatively cheap to buy additional NI years, so if you can otherwise afford to retire earlier there's no need to stick it out to 61.

MetManMark said:

But would there be value in moving more of my existing investments into my pension?

In principle, yes, for someone who will be a basic rate taxpayer in retirement one approach to maximising the tax benefits would be to enter retirement with all your savings inside your pension and none in cash, ISAs etc.

You'd need to choose your pension investments to match your risk tolerance.

Which leads me on to:

MetManMark said:

My ISAs are stocks and shares and my pension is a more simple tracker.

Are your ISAs invested in the shares of individual listed companies? That's quite a high-risk investment strategy. What led you to this approach rather than a fund like the tracker you chose for your pension?

Albermarle

My thinking is that I will get tax relief when I pay into my pension and then I'll also get 25% tax free when I take it out. So I will get double benefits from it

It is not quite as good as that.

From what you say if you make additional pension contributions, they will mainly just attract basic rate tax relief.

When you with draw the money you will get 25% tax free and 75% taxable, which gives an overall benefit of 6.25%.

However if any of the tax relief is at 40%, the benefit is much bigger. Also if after retiring but before receiving the state pension, you will still have your personal allowance so if you take taxable pension income up to £12570( currently) you will not actually pay any tax so again boosting the tax benefit.

From 55 to retiring at 62 I diverted cash savings into my pension, exactly for the same reasons you are thinking of. 

MetManMark

QrizB said:

MetManMark said:

It is still a long time off but thought I should start thinking about it more seriously now...

I'm a few years older than you, and hoping to retire slightly younger than you are, but 47 to 61 is not as long a time as it sounds! You're quite right to start planning now.

MetManMark said:

I plan to retire at 61 as at that stage I will have maxed out my number of NI years.

Is that the only reason why you've chosen 61 as your target? It's relatively cheap to buy additional NI years, so if you can otherwise afford to retire earlier there's no need to stick it out to 61.

MetManMark said:

But would there be value in moving more of my existing investments into my pension?

In principle, yes, for someone who will be a basic rate taxpayer in retirement one approach to maximising the tax benefits would be to enter retirement with all your savings inside your pension and none in cash, ISAs etc.

You'd need to choose your pension investments to match your risk tolerance.

Which leads me on to:

MetManMark said:

My ISAs are stocks and shares and my pension is a more simple tracker.

Are your ISAs invested in the shares of individual listed companies? That's quite a high-risk investment strategy. What led you to this approach rather than a fund like the tracker you chose for your pension?

Thanks @QrizB for all these comments:

I am planning on 61 as my wife is 6 years younger and our daughters will be just finishing university (if they chose to go). So that is my current target (which may well change...).

The SIPP is a mix of UK, UK and global tracker funds. My ISA pot is somewhat larger and contains a mix of funds. Interestingly I don't think that my ISA is performing any better than the trackers in my pension...

M

MetManMark

Albermarle said:

My thinking is that I will get tax relief when I pay into my pension and then I'll also get 25% tax free when I take it out. So I will get double benefits from it

It is not quite as good as that.

From what you say if you make additional pension contributions, they will mainly just attract basic rate tax relief.

When you with draw the money you will get 25% tax free and 75% taxable, which gives an overall benefit of 6.25%.

However if any of the tax relief is at 40%, the benefit is much bigger. Also if after retiring but before receiving the state pension, you will still have your personal allowance so if you take taxable pension income up to £12570( currently) you will not actually pay any tax so again boosting the tax benefit.

From 55 to retiring at 62 I diverted cash savings into my pension, exactly for the same reasons you are thinking of. 

Thanks @Albermarle

At 60 I will be eligible for part of my civil service pension so will get ~£11k from that until my state pension / rest of my civil service pension kicks in.   But you are right that any additional payment into my SIPP will be at the basic rate of tax relief.

M