"Should I transfer my Isa into a Sipp?"

24 April 2018
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A 69-year-old reader wants to know if a personal pension’s tax benefits make it a better option for him.

Should I transfer my Isa (individual savings account) to a Sipp (self-invested personal pension)? I don’t need the growth or income from the Isa, while the tax relief and inheritance tax protection on a pension appeals. I’m 69 years old, in reasonable health and a basic-rate taxpayer, although I could become higher rate.

Treatment considerations

You need to weigh up the tax treatment of both investments before you move anything.

“An Isa provides tax-free growth and income now, but will ultimately be subject to inheritance tax (IHT) at a maximum of 40%,” explains Danny Cox, a chartered financial planner at Hargreaves Lansdown. “Move it into a pension and it’ll be outside your estate for IHT purposes, but you would have to pay income tax on any withdrawals once you’ve taken the 25% tax-free cash.”

If you do move your Isa to a pension, you would also benefi t from tax relief, as Andy James, head of retirement planning at Tilney, explains: “For basic-rate taxpayers, this is equivalent to a 25% increase in the contribution, with the relief given automatically. For higher-rate taxpayers, it amounts to 66.6%, although you will need to reclaim the additional relief from the taxman.”

Pre-operative requirements

The transfer process itself also needs consideration. Mr Cox says that as well as the pensions lifetime allowance of £1,030,000, there are a number of annual pension contribution limits. “The maximum you can invest is either £3,600 or 100% of your earnings, capped at £40,000, whichever is higher,” he explains. In addition, if you’ve already taken income from a personal pension, beyond the tax-free cash, this £40,000 limit comes right down to £4,000.

If these limits are a concern, you could drip-feed the money over a few years or boost the amount you can pay in with unused allowances from previous years.

“You can carry forward any unused allowances from the previous three tax years,” explains Mr James.

Potential side-effects

As you can’t actually transfer an Isa into a Sipp, you’ll need to cash in your Isa and use the proceeds to make a pension contribution. “This will result in some time out of the investment markets, which could mean buying back your investments at a higher value,” says Martin Bamford, chartered fi nancial planner at Informed Choice.

He also highlights your choice of pension. “If you don’t need the full investment fl exibility that comes with a Sipp, a personal pension will have lower charges,” he explains.

Another option for the IHT benefi t may be sticking with your Isa and investing in qualifying AIM (Alternative Investing Market) shares, which will be IHT-free after two years. Mr Cox adds: “This will save IHT, but AIM shares are riskier than normal blue chips.”

Long-term prognosis

Ultimately, your decision comes down to whether or not you need to access the money. “If you’re unlikely to need the money out of the pension, or at least not more than the tax-free cash sum, the tax relief and potential saving on IHT make it a favourable move,” says Mr James.

If you take more income from it, it will be subject to income tax. And if it pushes you on to the higher rate, moving to a pension will be less beneficial. “Minimising lifetime and death taxes is a tricky balancing act,” he adds. “Unfortunately, it can only be done perfectly with the benefit of hindsight.”

Jargon buster

Isa stands for individual savings account. The key advantage is that savings or investment growth in an Isa is free from tax. The 2018/19 limit for adult Cash, Innovative Finance, and Stocks and Shares Isas is £20,000.

Sipp stands for self-invested personal pension. Rather than using a traditional pension provider to invest in, where pension funds can be limited, a Sipp gives you the chance to pick exactly where you want your money to go. This can include funds, investment trusts, exchange traded funds and shares.

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