When it comes to pensions and ISAs, most people in my experience find ISAs much easier to understand and so would like to convert their pension to an ISA.  

After all ISAs are free of Income and Capital Gains Tax. For most types of ISAs what you put in grows tax free and you don’t pay any tax when you make withdrawals. There are usually no restrictions in the age you can make withdrawals or on the amount you can withdraw. 

Pensions, whilst a great savings product are much more complex. With different rules on access and tax consequences.  

Unfortunately, it is not possible to transfer a pension into an ISA. However, there are ways and times you might want to consider moving money out of a pension and re-investing it back into an ISA.  


How to convert your pension to an ISA 


The strategies about to be discussed are mainly applicable to you if you have a defined contribution pension whether that be an old company pension or a personal pension like a SIPP. 

You must be over 55 (57 from 2028) to be able to withdraw money from a pension. 

Essentially, there are two ways you can get money from a pension to an ISA. 

#1 – Pension tax free lump sum 

When you take money out of a pension for the first time you should have the option to take a lump sum out tax free. It’s usually up to 25% of the pension value.  

You don’t need to take 25% of the whole pot out in one go you could take 25% of a smaller part of your pension.  

Once you have the money in your bank account you could re-invest this back into an ISA.  

You are limited to contributing up to £20,000 per tax year to an ISA, so you don’t want to be taking a lump sum higher than this from your pension unless you are able to use your spouse or partner’s ISA allowance too. 

Taking some or all of your tax-free lump from your pension and re-investing it into an ISA might not be the wisest thing to do.  

For a start, once you’ve taken the full 25% tax free lump from your pension you will not be able to take any further tax-free lump sums. This could mean missing out on 25% of a larger pot in the future with some good investment growth.  

There is also the issue of Inheritance Tax. More on that in a moment. 

#2 – Pension income 

The other way to move money from your pension to an ISA is to take regular income from your pension up to the Personal Allowance.  

Everyone is entitled to a Personal Allowance each tax year which means they can ‘earn’ up to £12,570 (currently based on tax year 21/22) before paying any Income Tax.  

‘Taxable’ pension withdrawals count as ‘earnings’ and therefore providing you take taxable withdrawals from your pension (withdrawals over and above your 25% tax free lump sum) up to £12,570 and you have no other taxable income, these pension withdrawals can be tax free.  

You can of course then re-invest the money back into an ISA.  

This method is actually one you should definitely consider if you don’t currently pay any Income Tax for example: 

  • Taking a career break. 
  • Living off capital/savings, perhaps you have sold a business or property or been awarded a payout. 
  • You are both living off your spouse or partner’s income. 

The reason for this is because if you have other pensions like a defined benefit (AKA final salary) pension and your State Pension that are due to pay out in the future then it’s likely these will use all of your Personal Allowance in the future.  

At that point any income withdrawals from your defined contribution pension will likely be taxed.  

Therefore, you may have a window now to start getting money out of your pension completely tax free and keeping it invested in an ISA which will then remain Income Tax free for life (providing the government don’t change the rules).   

What you need to consider before converting your pension to an ISA


So, we have looked at a couple of ways you can in fact convert your pension to an ISA.  

However, there are a few things you need to be aware of before attempting any of this.  

  1. Pensions are a great Inheritance Tax planning tool. Money held inside a pension on your death is free of Inheritance Tax providing it is paid to beneficiaries within 2 years. ISAs are not free of Inheritance Tax (unless you invest in shares qualifying for Business Property Relief). 
  2. Taking pension ‘income’ flexibly means being subject to the Money Purchase Annual Allowance. This will result in you only being able to claim tax relief on contributions up to £4,000 (21/22) into pensions in the future. So avoid doing this if you plan to go back to work and/or want to make larger pension contributions in the future.  
  3. You will trigger a Lifetime Allowance test. Taking money from your pension is called a Benefit Crystallisation Event and therefore your pension will be tested against the pension Lifetime Allowance. This could trigger a tax charge if you end up over the Lifetime Allowance.

So as always there are pros and cons but ultimately there are ways to convert a pension to an ISA if it is something you really wish to do. You just need to be clear on why you’re doing it and how it benefits you. 

If you have a retirement strategy in mind why not run it by us first in a free, no obligation phone call? We would be happy to chat it through with you and point out anything you need to be aware of. You can book in a slot here. 


Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.