Transfer ISA to Pension?Written on July 7, 2018 by Kirk Rice LLP
Financial Services QuestionsThe Question:
My husband and I have a number of ISAs and would like to know if these can be transferred to a pension. Also, is this a good idea?
Kirk Rice LLP answers:
A lot of families are doing just that because they can boost their savings and pass money on death more flexibly and tax efficiently, but it may not be suitable for you. Let’s assume that £12,500 of your income is taxed at 40% (Higher Rate Income Tax) and you have more than £50,000 in various investment ISAs. Let’s suggest you invest £10,000 from an investment ISA into your pension. It will be boosted automatically to £12,500 by tax relief. You’ll also benefit from an income tax reduction of £2,500 through self-assessment. So you have legitimately gained £5,000 from HM Revenue and Customs.
Someone who is a basic rate taxpayer receives only the boost of £2,500 but cannot also obtain the tax reduction. High earners can set the pension against any 45% tax they pay. Over a number of years you could repeat this exercise and achieve a significant boost to your savings. However, you‘ll know that you can withdraw ALL your money from ISAs without paying income tax on it. A pension is only ever able to let you take 25% of the fund in the same way AND only when you are 55 years old. Withdrawals above the 25% are added to other income in the tax year and therefore may be taxed at up to 45%. If you’ll need to withdraw all your ISA money in the future a transfer to pension may not be appropriate.
One of the reasons why people have transferred is the future death benefits. Money in an ISA is considered part of a person’s estate and may be subject to inheritance tax at 40% on their death. Anyone in a marriage or civil partnership can pass their ISA to their spouse or partner on first death without any inheritance tax. Pension funds are considered separate from the estate on death and the tax treatment is determined by the investor’s age at death. Before age 75 the whole fund is passed to nominated beneficiaries to draw on as they wish without tax deducted. After age 75 the beneficiaries can draw whatever they need from 6th April 2016 and will pay income tax on it as if it is their earned income (in 2015/16 the rate of tax is fixed at 40%). Someone without earned income will not be able to make the level of contributions suggested in this brief look at ISA to pension transfers.
Moving out of cash and safe haven investments in search of higher returns will involve accepting a greater risk of capital loss. Past performance is not a guide to future performance. The value of your investment and the income from it will vary and the initial investment amount cannot be guaranteed.
Any you are interested in discussing this topic further, you can telephone Michael Powell in Ascot on 01344 875 000, or email info@kirkrice.co.uk
Do you want to recieve similar articles straight to your inbox?
Sign up to our fortnightly newsletter to receive similar articles on topics including personal tax, business accounting, investments, pensions and financial planning straight to your inbox.
(This article is correct as of 12 July 2018)
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
Recent Posts
-
Career Story – Rebecca EvansWritten on October 9, 2026 by Kirk Rice LLP
-
VAT Compliance: What Every SME Should KnowWritten on October 7, 2026 by Jonathan Swarbrick
-
6 Things to Know About Tax on Extra Income: Second Jobs, Freelance Work, & MoreWritten on October 5, 2026 by Jane Page
-
Business Valuation – Where Do I Start?Written on October 2, 2026 by Kirk Rice LLP
-
Payroll – Should You Outsource?Written on October 1, 2026 by Kirk Rice LLP
