Should you move ISAs into to your pension?
Posted by: Swindells FP, on March 20, 2015.
April 6th brings additional opportunities for savers, when the new flexible access to pensions becomes available, allowing you to draw from your savings.
If you are nearing 55 you may be wondering if there is an advantage to moving your ISAs into your pensions. It’s a very valid thought.
Julie Hudson, of Standard Life clearly explains why this is so in her article ISA passes to pension. Pension scores! “The numbers add up”, she says.
“Let’s assume Anna is 52 years old, has a salary of £92,000 and stocks & shares ISAs worth £50,000. She also has a pension valued at £200,000, as well as cash savings for emergency use.
If Anna closes her ISAs and pays the £50,000 into her pension, her contribution would turn into £62,500 because of the tax relief top-up in tax year 2014/15. That’s £12,500 the tax man has added to her savings, just because they now sit inside her pension instead of her ISA.
It’s also possible that Anna could select the same investment funds inside her pension as she used to have inside her ISA. So the ‘lift and shift’ exercise really is about changing the ‘tax wrapper’ which sits around the investments, and of course, the tax relief top-up on the way in.
And because Anna is a higher rate taxpayer, there’s a further uplift to her finances if she files a tax return and claims higher rate tax relief. If she does so, she’ll receive a refund of income tax of £12,500 – paid into her bank account from HMRC – because more of her income will be taxed at 20% instead of 40%.
So far, so good. But there’s a restriction on the annual amount which can be paid into a pension, and this is £40,000. Anna has exceeded this, so needs to use the carry forward rules linked to unused annual allowance from the past 3 years. Luckily, she has some carry forward available, since she did not make full use of her pension allowances in recent years.”
Additional tax advantages
Moving ISAs to your pension provides additional tax advantages. For a start, the money held within a pension does not attract inheritance tax, whereas an ISA usually does.
Continuing with her example of Anna, Julie Hudson also comments that, “A final consequence of an ISA-to-pension transfer is the tax treatment of withdrawals. You don’t pay tax when you take money out of an ISA. With a pension, 25% of what you take out is tax free, and the rest is taxable, depending on what rate of income tax you pay. But if Anna is going to be a basic rate taxpayer when she retires, then the sums stack up in her favour, in terms of the overall benefit of re-homing her ISA money.”
Making the most of your savings
If you wish to discuss how you can benefit from the pension changes that are available from April 6th contact us on 01825 76 33 66 or use the form on the contact page to book a consultation.