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Is it better to take the 25% tax free lump sum from my pension, then put it in my stocks and shares ISA, or take the taxable income from the 100% pension pot?

24 November 2021

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Question by Ian

Is it better to take the 25% tax free lump sum from my pension, then put it in my stocks and shares ISA, or take the taxable income from the 100% pension pot?
In my case it’s likely to be less than £60k pension pot, but I do have a defined benefit pension from an old employer, which will take me over the tax threshold?


Answered by Kris Amliwala

Hi Ian,

There are numerous factors to consider, such as your total other income for the tax year in which you wish to access your pension. If this is likely to be subject to income tax, you may wish to only access the 25% at this time, then the remainder via flexi-drawdown when your other sources of income will decrease.

Also do consider that any funds within the pension are likely to be invested very tax-efficiently, for income, capital gains and inheritance tax. If funds are accessed from the pension, then they would fall inside of your estate for inheritance tax and therefore decreasing the overall tax efficiency, this is also the case if the funds are invested into an ISA, as ISA's are subject to inheritance tax (unless invested in business relief).

If you have £0 other taxable income for the tax-year, and accessed your £60k pot, £15,000 would be your tax-free cash (25%), £12,570 would fall within your personal allowance and be subject to income tax at a 0% rate and the remaining £42,430 would be subject to income tax. Therefore, I would not consider accessing all of your pension in this manner, and if desperately required, spread accessing your funds over a number of different tax years when your allowances effectively renew.

Are you also like to receive the State Pension and can obtain a free estimate of your personal entitlement from the Department for Work and pensions by completing a BR19 form.

It may be worthwhile using the services of an advisor who uses cashflow planning (not using excel) to help you put all of the pieces of this jigsaw together.

Best regards

Answered by

Kris Amliwala

Chartered Financial Planner

I really enjoy helping people align their wealth to their life goals and ambitions. By first spending time in understanding you, your life and your goals, before looking at cashflow planning and then if needed, any financial solutions, I find delivers the most rewards.