Adding to DC pension pot, or leave money in an ISA

[DaisyDukesAuntie]

At nearly 53, I am considering early retirement from age 55 earliest, 57 latest.

I can access my pension pot at 55 under pension freedom and contributing as much to my pension through my monthly salary as I can afford. My employer also adds a good contribution too.

I have unused an annual pension allowance from the previous three tax years which totals about 60 K. I have about 90 K in a nicer. My ISA is just a cash ISA Aisha so interest rate is 2.75, the average growth in my pension pot, which is invested of course, has naturally fluctuated but on average is about 20% every year.

I don’t anticipate needing the money in the ISA for anything else, and have some other savings for emergencies if needed. I think given I have my sights set on retirement, topping up my pension using this unused pension allowance, funded by my ISA seems sensible.

I’ve done a fair bit of research and will get some advice on how to submit my tax return correctly to make sure the unused annual pension allowance is reported correctly, but I’m interested in views from others.

Is there something you would do?

Leaving it in a 2.75% ISA is losing money. Regardless of whether you move the £60k to a pension, make sure you transfer to an ISA with a much better rate.

Overall, it sounds like a good idea - you will get the tax relief going in, and can take the 25% lump sum on retirement if you lose the money.

Double check that you can take your pension from 55.
I have just turned 54 and when I turn 55 in 2027 will have a number of months during which I could take my pension before the rules then change to 57 on 6 April 2028.
If you are currently 52 you aren't going to hit 55 before the change date and your date will be 57.

Oh, and if you have other savings for emergencies, get them in your ISA.

if you have used your ISA allowance this year then use the other savings for the pension contributions.

I’m doing pension and isa as I like the idea of tax free savings, I’ll get a little growth/income from the isa and great it won’t be taxed in the future.

Monzo are paying 3% just on instant access savings.
Check your pension age as it changes from 55 to 57 - will you turn 55 before 6th April 2028?
How much do you currently have in your DC pot and do you intend taking the 25% tax free cash?

Thanks - I have checked and have a protected pension age of 55, under my scheme because of when I joined it

You could transfer to a cash isa with a better interest rate

if you are in a DB scheme is the extra money you’re putting in to fund a tax free lump sum? If yes, when you get the tax free lump sum will you spend it or will you want to put it in an isa?

If a DC scheme, once you put it in the DC scheme you can only take so much out tax free.

i think the best thing would be to keep
your isa and get better interest rates. Maybe at some point consider a stocks and shares isa that is similarly invested to your top up pension contributions that you could keep for the long term savings backup. Perhaps wait until the current bubble is gone though!

Your cash ISA rate is very low so you need to get that transferred so it is earning a meaningful interest (I just transferred into a big name ISA giving 4.4%).
Check the date you will be able to access your pension as it is increasing to 57 soon.
Putting money into your pension is always a good idea so yes, consider putting in a lump sum.
If you are taking your TFLS, will this be all the cash you need for the foreseeable future as if so, you could tie your savings up for longer.

I’m in a similar situation and maximising my lump sum through extra contributions, but when you get a (hopefully huge!) lump sum, if you don’t spend it you will want to put in an isa(s) again and you’re limited to the amount per year. I’m thinking I will end up paying tax on interest for a few years (tough problems I know, but I am limiting spending now to make it happen)

Check out money saving expert for other isa options

What you can put in in any tax year - despite you having what you think are unused allowances from prior years - is still limited to your earnings in the year.

mse - as someone up thread mentioned - is a good source of info. Particularly the forums.

It is isually better to put it in the pension if you don’t need it until you retire -
I calculate that it will make you an extra £3000
£60,000 times 25% tax free times 20% tax rate but that is not the whole story - if it is going to sit in a pension for 10 years or more the charges will be significantly more - isa usually have no fee!

just make sure that the pension provider has an appropriate fee structure

you will get tax relief at higher rate if that applies to you
i think the only time it becomes marginal is if you are going to be a higher rate tax payer in retirement- but that seems unlikely unless you end up having to drawdown a large sum in one tax year (eg for care home fees)

Thanks all - I knew my ISA rate was rubbish but had no idea I could transfer without impacting the £20k annual limit! oMG Mumsnet thank you for that gem of wisdom I feel like a right idiot! I’d always assumed it was stuck there

Does that override the change in government of when a pension can be taken? I thought give said all pension ages were shifting to 57 from 2028.

You can also transfer money in a cash ISA into a Stocks & Shares ISA if you wanted. As long as you do it as an ISA transfer to retain the ISA wrapper.

Yes.
There are specific rules, https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062215

@DaisyDukesAuntie i rely on Martin Lewis for top rates https://www.moneysavingexpert.com/savings/best-cash-isa/

Keep 6 months expenses in a (better) ISA so you have an emergency fund! You never know what will happen with jobs in this economy.

Getting the tax relief going in is definitely worthwhile. You seem to have already thought about whether you would need access to cash.

In my planning the one bit of advice that I have come across that might affect your thinking is to have 2 to 3 years of expenses in cash so you can suspend drawing down while the market is low. I understand that it is thought that the market generally recovers within 2 to 3 years. I am no expert though.

You'll receive tax relief on anything you put into a pension, but set against that is that anything you withdraw from the pension as income is going to be taxed at your marginal rate.

If you leave it in an ISA, any withdrawals will not be taxed. Agree with others that your Cash ISA interest rate is poor. You'd be much better off transferring at least some of that into stocks and shares.

Ay the moment your ISA is tax free
If you put it on a pension then only 25% of it will be tax free when you take it out.

If you want your ISA to achieve the same gains as your pension you need to transfer your cash ISA to a s&s ISA. You should plan to lock it away for 5 years minimum to overcome any dips in the value.

We don't know the OPs full circumstances, but its normally more tax efficient to use pensions rather than ISAs when getting close to access age. Saying that an ISA is tax free but only 25% of a pension will be is a misunderstanding.

Regarding your ISA, please ensure you do not withdraw the money to put into another ISA, you lose the tax free perks. You must instigate a TRANSFER to a new provider, then it retains tax free status!!

Is it the case then that if OP withdraws £20k from an isa, and puts it into a DC pension pot, she will then be credited with £5k at that point?

But then the income she receives from the DC pension pot would be taxed as income ( after she has received the 25% tax free lump sum).

it’s very complex!

Yes, that is the case - with the proviso that pension contributions cannot be greater than earnings, and are capped at £60k per year.

If someone is not earning at all then the cap is £3,600 (£2,880 plus tax relief of £720).

It's complex because the UK is an outlier on taxation of pension income: nearly everywhere else in the world does not offer tax relief on contributions going in, in exchange for much kinder treatment on the way out.