Funding a Pension from an ISA

Good morning,
I have an adviser who is thinking of using funds currently within an ISA to fund a personal pension contribution. The client is over the LTA. His rational is that the client would receive tax relief and this sum would compound (growth) over the years.

My thinking is that he is taking the funds from a tax free income account and moving it into a taxable income account. There is the (current) protection from IHT in the pension which is a benefit, but only if these funds are not withdrawn and this tax benefit could change in the future.

The client will receive the State Pension and a DB income which will take him to the threshold of the basic rate band and therefore if he need pension income from the PP, this could be taxed at a higher rate, whereas income from the ISA would keep him within the BRB.

Is there any other benefits of doing the proposed contribution?

Thanks

Comments

  • benjaminfabibenjaminfabi Moderator

    Depends on the tax rate now.

    Assume £10k is in the ISA. In 15 years at 5% net that's worth £19,800 and costs nothing to take out. Net result - £19,800

    Assume £10k to a SIPP. That's £12,500 after RAS if they're BRT. In 15 years at 5% net that's worth £24,750 and costs 40% to take out. Net result - £14,849

    Assume £10k to a SIPP. That's £12,500 after RAS if they're HRT. Then assume they put the £2.5k HR relief back into the ISA. In 15 years at 5% net that's worth £24,750 and costs 40% to take out plus £4,950 in the ISA and costs nothing to take out. Net result - £19,800

    If they are 45% now then there is a marginal benefit.

    Now, when you add in the loss of £500 of PSA when crossing the HRT threshold, there are knock-on downsides to the pension approach.

    There is the obvious IHT advantage to having capital in the pension. But there are also unknowns, such as will pension income tax change (eg could we see an NIC charge code introduced for pension income?)

    Engage cynic mode...

    Adviser fees at 1% p.a. in the top option - £2,158 over 15 years.
    Adviser fees at 1% p.a. in the bottom option - £3,237 over 15 years.

    And some advisers will charge an initial percentage on new money (in this case, the tax relief generated).

    Please someone else chip in if the above is missing something, or to provide a counter-view, as I don't think any of the above is necessarily wrong.

    Benjamin Fabi 
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