Transferring a Pension into an ISA

If you’re approaching retirement, you might be wondering if you can transfer your pension to an ISA for the unique benefits they offer. While pensions and ISAs are both tax-efficient long-term savings vehicles, the transfer rules differ.

Here, we explain whether you can transfer a pension fund into an ISA, how it works, the drawbacks to consider, tax implications, and where to get professional advice.

Can you transfer a pension into an ISA?

No, you cannot directly transfer a pension into an ISA in the same way you might transfer one pension to another or move an ISA between providers.

However, it is often possible to move money from a pension into an ISA, but it will depend on:

• Your age

• The type of pension you hold

• How much you want to withdraw and move

• Your current tax position

Understanding your specific circumstances and the structure of your retirement savings is crucial when considering a transfer from a pension to an ISA.

Why pensions can’t directly transfer to ISAs

Pensions and ISAs are governed by different UK HMRC tax regimes:

• Pensions: As a pure retirement savings vehicle, pensions benefit from deferring tax until retirement (you get tax relief on contributions and pay no tax while your pot grows, but you pay tax on withdrawals over your 25% tax-free allowance).

• Individual Savings Accounts (ISAs): You pay into ISAs with money you’ve already paid tax on, but your account can grow without paying tax on any gains, and when you start withdrawing, you pay no income tax (as you would with the bulk of your pension).

Because they’re different types of tax wrappers, HMRC doesn’t allow a direct “wrapper-to-wrapper” transfer from a pension fund to an ISA.

Transferring money from different types of pensions

Here are the key things to know about making transfers from defined contribution (DC) pensions and defined benefit (DB) pensions.

Defined contribution (DC) pension transfers to an ISA

If you have a defined contribution (DC) pension, you can usually access the pension from age 55 (rising to 57 from 2028), and then pay that money into an ISA, subject to:

• Income tax on withdrawals over your 25% tax-free amount.

• Annual ISA allowance limits (£20,000 across all ISAs per tax year).

Defined benefit (DB) pension transfer to an ISA

With a defined benefit (DB) pension, transferring into an ISA is a little more complex because:

• You cannot partially withdraw funds.

• You usually receive an income for life, not a pot of money you control.

• Transferring out requires converting benefits into a lump sum via a DB pension transfer (which legally requires regulated financial advice for pensions over £30,000, but is advisable regardless of pension size).

Once you’ve transferred to a DC pension and accessed the funds, you could then look at diverting money into ISAs. However, this route is complex, irreversible, and heavily regulated.

Can you transfer all of a pension pot or just part of it?

If you’re eligible to access and control the money within your pension:

• You can usually withdraw part of your pension and move that into an ISA.

• Or, fully withdraw the pension, pay any relevant tax, and then contribute to ISAs over time.

Because ISA contributions are capped annually at £20,000 total (individual limits apply to each type of ISA), transferring a large pension fund to an ISA is usually best done gradually over multiple tax years rather than all in one go (except for smaller pensions).

What types of ISAs can be used?

Once you’ve withdrawn money from your pension, it can generally be paid into:

• Cash ISAs: £20,000 limit (reducing to £12,000 from April 2027 for under 65s)

• Stocks and Shares ISAs: £20,000 annual limit

• Innovative Finance ISAs: £20,000 annual limit

• Lifetime ISAs (LISAs): £4,000 annual limit with additional restrictions

Your £20,000 annual allowance is the total you can transfer from your pension into your ISAs each tax year. However, you get to decide how to spread that money across them. You can also hold and pay into multiple ISAs each year.

Benefits of transferring money from a pension to an ISA

For some people, moving money from a pension to an ISA can offer meaningful advantages:

• Greater flexibility: ISAs have no upper limits or restrictions on withdrawals once your money is inside, unlike pensions, which are governed by age and access rules.

• Tax-free income: All withdrawals from ISAs are free from income tax, regardless of your age or how much you withdraw. So, they can allow for more flexible tax planning.

• No lifetime allowance or pension rules: ISAs are not subject to lifetime limits, minimum access ages, or at the mercy of potential future changes to pension legislation.

• Estate planning advantages: Money in ISAs can be accessed by beneficiaries immediately; it doesn’t count as pension income on death; and it helps simplify estate administration compared to pensions.

Drawbacks to consider

Despite the benefits, transferring pension funds to an ISA is not always a good idea due to:

• Immediate tax cost: Pension withdrawals (above the 25% tax-free portion) are taxed as income, which can push you into higher tax bands if you receive a State Pension and have any other income (earned or from pensions).

• Loss of pension tax advantages: Once money leaves a pension, it loses protection from income tax on withdrawal and may become part of your estate for inheritance tax (IHT) purposes.

• Annual ISA allowance limits: You can only contribute £20,000 per tax year to your ISAs, making large transfers slow and potentially inefficient, or leaving you out of the market for long periods.

• Impact on future pension benefits: Accessing your pensions to withdraw and transfer can trigger the Money Purchase Annual Allowance (MPAA) and reduce how much you can contribute to pensions in future.

• Loss of benefits: In some cases, transferring or converting a pension could result in the loss of valuable benefits, so always have your adviser check this first.

How to transfer a pension into an ISA

While there’s no direct pension-to-ISA transfer, the process usually follows these steps:

1. Review your pensions with an adviser and create a plan.

2. Decide how much to withdraw and transfer to an ISA (partial or full).

3. Utilise your tax-free cash allowance (if available).

4. Withdraw taxable pension income carefully, often spread across years.

5. Pay withdrawn funds into an ISA, within annual allowance limits.

6. Repeat over time, if gradually moving money out of pensions and into ISAs.

This process requires careful planning to coordinate with the rest of your finances to maximise the benefits of transferring and avoid unnecessary tax obligations.

If you’d like an introductory chat to discuss your pension and ISA transfer options with an independent, FCA-regulated adviser, you can get started below.

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Tax impact of transferring to ISAs

Here’s an overview of the key taxes and what to be aware of:

Income tax

When you withdraw money from a pension to move it into an ISA, the withdrawal itself is usually a taxable event. In most cases, up to 25% of your pension pot can be taken tax-free up to your maximum Lump Sum Allowance (LSA), which is currently £268,275.

Withdrawals over this with the remaining 75% of your pension are taxed as income at your marginal rate (20% basic rate or 40% higher rate, for example). If you withdraw a large amount in one tax year, this can push you into a higher tax band, significantly increasing the tax you pay.

This is a key reason why pension-to-ISA transfer strategies are often spread across multiple tax years to manage your income tax more efficiently

Inheritance tax (IHT)

Currently, pension funds are typically deemed outside of your estate for inheritance tax (IHT) purposes, meaning they can often be passed to beneficiaries free from IHT if structured correctly. However, this is set to change in April 2027 when they will become subject to IHT.

Once money is withdrawn from a pension and placed into an ISA, it usually becomes part of your estate and may be subject to inheritance tax (up to 40%). This makes transferring pension funds into ISAs less attractive for estate planning in many situations, but soon, both ISAs and pensions will be included in your estate.

Capital gains and dividend tax

Once money is successfully inside an ISA wrapper, it benefits from favourable ongoing tax treatment. Any growth within the ISA is free from UK capital gains tax (CGT). Also, income from dividends or interest payments within the ISA is completely tax-free.

There’s no limit on how much you can build up and withdraw from ISAs, and the withdrawals don’t factor into your income for that year. This can make ISAs appealing for later-life flexibility and generally less hassle. Still, these benefits need to be weighed carefully against the upfront tax cost of removing funds from a pension.

Get independent pension transfer advice today

Deciding whether to move money from a pension to an ISA is rarely straightforward, and it’s well worth sitting down to make a proper plan before you make any moves.

Here’s why people trust us to help them get advice if they’re considering a pension transfer to an ISA:

• Our advisers are independent, giving you the widest choices

• Free initial pension chat with no obligation to proceed further

• Get tailored advice based on your pension transfer goals

• Access to pension specialists with experience in complex ISA transfers

If you’d like a free, no-obligation chat with a qualified pensions adviser about transferring a pension to an ISA, you can get started here.