In our weekly series, readers can email in with any question about retirement and pension savings to be answered by our expert, Tom Selby, director of public policy at investment platform AJ Bell. There is nothing he does not know about pensions. If you have a question for him, email us at money@inews.co.uk.
Question: I’m 63 years old and have an ISA worth £40,000 that is currently invested in a one-year bond. That bond reaches maturity this year. Can I move the money in my ISA into my workplace pension and is there any advantage to doing so as I approach retirement?
Answer: While you cannot transfer money directly from your Cash ISA to your workplace pension, you can withdraw the money tax-free and use that money to make a contribution to your retirement pot.
Given you are over the minimum pensions access age – which is currently age 55 and due to rise to age 57 in 2028 – any contributions to your pension will be available to you immediately if you need them, with up to a quarter available tax free and the rest taxed in the same way as income.
Your pension contributions could also benefit from the upfront boost provided by tax relief, which is currently 20 per cent for a basic rate taxpayer, 40 per cent for a higher-rate taxpayer and 45 per cent for an additional-rate taxpayer.
In practical terms, this means paying £100 into a pension costs a basic-rate taxpayer £80, a higher-rate taxpayer £60 and an additional-rate taxpayer £55. If you are a higher or additional-rate taxpayer, you may need to claim your additional tax relief entitlement from HMRC.
Before making any pension contributions, you need to familiarise yourself with the tax rules – in particular the rules governing how much you can contribute and receive tax relief.
You can only make personal contributions each tax year worth up to 100 per cent of your ‘relevant earnings’ in that tax year. These earnings include things like salary and bonuses but do not include property income or pension income.
You can find a full list of what counts as relevant earnings for these purposes here. For example, if you have relevant earnings of £20,000, this is the maximum (inclusive of tax relief) you can contribute to a pension. If you have no relevant earnings, you can contribute up not £3,600, again inclusive of tax relief, to your pension.
There is an overall ‘annual allowance’ of £60,000 a year which covers personal pension contributions, employer contributions and tax relief.
You can also ‘carry forward’ up to three years of unused annual allowances from the three prior tax years, although you will still be restricted by the 100 per cent of relevant earnings rule mentioned above.
If you have flexibly accessed your retirement pot already – for example, by taking taxable income from your pension via drawdown – your annual allowance will be reduced to £10,000 and you will lose the ability to carry forward any unused allowances.
If you are able to contribute some or all of your £40,000 ISA fund to a pension, this could be advantageous from a tax perspective.
As well as generating extra tax-free cash (assuming you have not already built up an entitlement worth the maximum of £268,275), if you are opting to keep your fund invested in retirement through ‘drawdown’, you could manage your withdrawals to minimise your income tax liability.
For example, if you were a 40 per cent taxpayer, you could receive 40 per cent tax relief on the way in, boost your tax-free cash entitlement and then pay 20 per cent income tax on the taxable portion on the way out.
If you are considering drawdown, you need to be comfortable managing your pension withdrawals and keeping your money invested with the aim of generating long-term growth.
If you don’t feel comfortable taking investment risk, there are cash-like investments available, such as government gilts, although holding large amounts of cash for the long term is generally not advisable as your fund will be eaten away over time by inflation.
If you don’t want to take any investment risk at all, you probably need to consider an annuity when you come to access your pension pot.
If you go down this road, it’s crucial to shop around for the right product, telling your provider about any health or lifestyle factors that might boost the income they offer. While annuities give security, in return you forgo flexibility and once you’ve made the decision, you can’t go back.