Pensions are a cornerstone of retirement planning, offering significant tax advantages and often employer contributions. However, a comprehensive retirement strategy involves optimizing all savings. One potentially powerful approach, particularly for those around 50, is transferring ISA savings into a Self-Invested Personal Pension (SIPP).
While ideally, contributing to both a SIPP and an ISA offers diversification, consolidating savings into a SIPP around age 50 can be beneficial. This strategy leverages the tax relief associated with pension contributions, maximizing potential growth.
Pension contributions receive tax relief based on your income tax bracket. For instance, a £10,000 contribution for a basic-rate taxpayer effectively costs £8,000. Higher and additional-rate taxpayers enjoy even greater relief, with the same contribution costing £6,000 and £5,500, respectively. Further tax benefits accrue by withdrawing pension benefits in a lower tax bracket during retirement.
Consider this example: Lucy, a higher-rate taxpayer, contributes £10,000 to her SIPP, costing her £6,000 after tax relief. Assuming 50% growth by retirement, her SIPP holds £15,000. She can withdraw 25% (£3,750) tax-free, leaving £11,250. As a basic-rate taxpayer in retirement, she pays 20% tax (£2,250) on the remaining amount, leaving £9,000. Combining this with her tax-free withdrawal, she receives a total of £12,750.
Had Lucy opted solely for an ISA, her initial £6,000, without tax relief, would grow to £9,000 – a significant £3,750 less than the SIPP outcome.
Why is this strategy particularly relevant for those around 50? ISAs offer immediate access to funds, while pensions are typically accessible at 55 (rising to 57 in 2028). Transferring to a SIPP closer to retirement age minimizes the risk of lacking emergency funds while maximizing tax-efficient growth.
Before making significant contributions, ensure you haven’t exceeded the annual pension allowance, as this negates the tax relief advantage. This strategy allows individuals nearing retirement to optimize their savings, leveraging tax benefits to enhance their retirement income. However, careful consideration of individual circumstances and financial goals is crucial.
