Should I transfer most of the money from the cash ISAs to a stocks & shares ISA?
03 September 2021
Question by Meg
I have almost £60,000 in separate cash ISA accounts which will be maturing in the next 6-8 months but only about £5000 in a NEST pension scheme which I no longer contribute to. Would it be better to transfer most of the money from the cash ISAs to a stocks & shares account or to divide the money equally with a new pension scheme. I am 50 years old.
Answered by James Greenly
Thank you for your question.
One of the main benefits of investing money into a pension over an ISA (whether it is cash or stocks and shares) is you will benefit from a government 'top up' of at least 20%. For example, if you want to make a contribution of £1,000 into your pension, it will only cost you £800, the government add £200 and this goes directly into your pension.
There are a few rules around how much you can pay into your pension. The main ones to note are that you can only contribute up to 100% of your 'pensionable' income each tax year. For most people this just means up to 100% of their salary. If you're not working and have no pensionable income, then you can still contribute up to £3,600 a year (which will cost you £2,880). There are a few different rules around pension contributions, however they're a bit complex and don't impact most people. You can read about them here: https://www.moneysavingexpert.com/savings/discount-pensions/
As you have a NEST pension, I am assuming that either your current or a previous employer set this up for you? If you're still working, then your employer has a legal obligation to pay into a pension for you. If you have previously decided to stop paying it, it is worth considering starting up these contributions again.
You can access your pension once you reach age 55, so although your money would be locked up, it’s not too long to wait. Once in a pension, the money also falls outside of your estate for inheritance tax purposes. Inheritance tax is only really a concern if your estate is more than £325,000.
As your money is currently in cash, you may be on the more cautious side when it comes to risk and investing. It's worth noting that even if you decide to invest some or all of your cash ISA money into your pension, you could still opt for a 'cash' fund - although I personally wouldn't advise this as you'll be losing money in real terms (after inflation has eroded the true purchasing power of your money).
Let's compare what the next 5 years would look like if you were to invest into your NEST pension (into a cash fund) vs. investing in a cash ISA:
Over 5 years, if you saved £2,880 a year into your cash ISA, assuming 1% annual interest, at the end of the period you would have £14,704. You would have saved a total of £14,400, so the total return would be £304.
Over 5 years, if you saved £2,880 a year into your pension, assuming 1% a year return, at the end of the period you would have £18,380. You would still have only saved £14,400, but the government would have added £3,600 for you. This would mean your total return is £3,980, 13x the return on your cash!
In summary then, you will almost certainly benefit from holding the money in your NEST pension over a cash ISA, but this money will be tied up for 5 years. If you have no need to use these funds over the next 5 years, then it could be a great way of taking advantage of the free government top up.
The other option as you’ve pointed out is to simply move your cash ISAs into Stocks & Shares ISAs, however this would mean you need to research and decide on an appropriate mix of investments and ISA provider. You could decide to use an online ‘robo adviser’ (see the Boring Money research on these) or open a Stocks & Shares ISA with a ‘DIY’ online platform. The benefit of using a robo adviser is they will select the investments for you. They will ask you questions to find out how long you can invest for, what your feelings are towards investment risk (i.e. how much volatility you can stomach!) and what your financial affordability is.
Ultimately, the decision will come down to what this money is going to be used for. If you can tie it up for at least 5 years and want it to provide for you once you’re into retirement, a pension seems a no brainer because of the government top up.
If you might need access to some or all of the money within the next 5 years, then a cash or stocks and shares ISA is likely to be the best bet for you.
Don’t forget, you could always ‘hedge your bets’ and keep some back in a cash ISA, move some into a stocks and shares ISA and invest some into your existing NEST pension.
Nothing here should be considered advice, you'll need to do your own research and make your own decision as to the right route for you.
Should you need any more support or guidance, please feel free to reach out.