Home Alternative Investments Should we draw from our pensions to fund Isas?

Should we draw from our pensions to fund Isas?


If personal loans have higher rates than mortgages it can be a good idea to pay them off first

This investor needs to weigh up the immediate tax benefits of pension contributions against a possible lifetime allowance charge

She should consider reducing her husband’s drawdown Sipp’s risk level

Reader Portfolio

Joanna and her husband

57 and 75


Pensions and Isas invested in funds and shares, cash, residential property.


Reduce debt, pay off mortgages by 2025, build up Isas and workplace pensions, withdraw from investment accounts efficiently, 5% annual total return plus 5% income when retired, reduce investments’ risk, spend less time managing investments.

Portfolio type

Investing for goals

Joanna is age 57 and earns £95,000 a year plus a discretionary bonus, which amounted to 20 per cent in the 2021/22 tax year. Her husband is 75 and retired last year. He receives £10,500 from the state pension, £14,500 from an index-linked final salary pension and £24,000 a year from a pension in drawdown which is run as a medium-risk portfolio by a financial adviser. It has a value of about £126,000 and they plan to run it down over the next five years.

Their home is worth about £1m and has three mortgages of about £260,000 in total.

They also have a fixed-rate personal loan with an outstanding balance of £28,000 for which they are repaying £400 a month.

Joanna and her husband also appeared in the Portfolio Clinic in 2019 (Should I drain our pension pots one by one? IC, 30.08.19)

“Our current net income barely meets our outgoings and we often have a monthly shortfall due to miscellaneous spending but not much in cash savings,” says Joanna. “Our fixed annual costs are £80,000 a year of which £53,000 is mortgage repayments. I would like to reduce our debt to make our monthly finances a little easier and be mortgage free by the end of 2025. When we are mortgage free, £50,000 a year after tax will enable us to have a comfortable lifestyle, as long as we can pay for big-ticket items out of savings.

“I was going to take the full tax-free lump sum from my £495,000 self invested personal pension (Sipp) to pay off a mortgage loan which expires this August. But due to the recent market falls the lump sum available is materially less than it was at the end of last year.

“So I am wondering whether to remortgage all three loans when they expire for a further two years, to allow the value of my Sipp to recover. I would clear the outstanding mortgage in 2025, when it would amount to about £100,000, with a £90,000 lump sum from a final salary pension I am due to start receiving at age 60, and assets in my individual savings account (Isa) which is currently worth about £50,000. But if I take the lump sum this pension will also start to pay out £13,000 a year.

“Alternatively, I could remortgage the larger loan which expires this August for a further two years and clear the two smaller mortgages when they expire next year using tax free lump sums from my Sipp and/or Isa money.

“After we have paid off our mortgages, my Sipp and my husband’s undrawn Sipp are likely to remain largely invested for some time. If and when we need to draw from them, would it be better to first take money from my husband’s Sipp, which is currently worth about £180,000, as he is likely to die before me?

“As we can’t make meaningful contributions to Isas while we are paying off mortgage debt, is it possible to take a £40,000 tax free lump sum from my Sipp in each of the next three tax years to build up our Isas? 

“I would like to contribute more to my workplace pension each month. I currently pay 5 per cent into it via salary sacrifice and my employer pays 4 per cent. I will also pay my March 2023 bonus into my pension as that would probably to take my income over £100,000 this tax year. Can I top up my workplace pension contributions with tax free lump sums at the end of each tax year if my normal contributions and bonus fall short? And if I am still working at age 60 when my final salary pension starts to pay out, I would like to increase my pension contributions up to the maximum allowances.

“However, my workplace pension’s investment options are limited and it is invested in the provider’s default balanced lifestyle strategy. Should I transfer some of the funds in this into my Sipp when it has grown to a meaningful value?

“I have been investing for over 30 years but I have become less interested recently. So I am considering moving the Sipps I manage to a lower cost provider and monitoring them occasionally until we need to draw from them.

“I would like our investments to make a total return of 5 per cent a year and, when I retire, also generate income of 5 per cent a year. However, while I have had a reasonably high-risk appetite this is diminishing, especially as our investments have been hit quite hard in the recent downturn. I feel uncomfortable when the value of our investments falls by more than 20 per cent in a year. But, other than taking my tax free cash, our undrawn Sipps are likely to remain invested for at least five years so we need the right balance of growth and wealth preservation.

“Our Isas are largely invested in equities. I don’t think that we need bond investments as we have a reasonable amount of fixed and or protected income. I think that the Isas should now be invested in low- to medium-risk funds as we will use them rather than our Sipps to top up our income.

“I also think that our portfolios should have less exposure to Baillie Gifford-run funds.

“I have mainly invest in funds but over the past five years I have also added direct share holdings with which I have had mixed fortunes. I now I want to reduce these as I don’t have the time or inclination to manage them.”


Joanna and her husband’s total portfolio
Holding Value (£) % of the portfolio
Hargreaves Services (HSP) 50,406 5.64
Sanlam Artificial Intelligence (IE00BYPF3314) 47,450 5.31
Legal & General Global Technology Index (GB00BJLP1W53) 46,459 5.2
Baillie Gifford Positive Change (GB00BYVGKV59) 43,998 4.93
LF Blue Whale Growth (GB00BD6PG563) 38,021 4.26
Baillie Gifford American ( GB0006061963) 35,049 3.92
Scottish Mortgage Investment Trust (SMT) 30,814 3.45
Sylvania Platinum (SLP) 28,294 3.17
Baillie Gifford Managed (GB0006010168) 27,379 3.07
Baillie Gifford Pacific (GB0006063233) 25,562 2.86
Baillie Gifford Global Discovery (GB0006059330) 24,060 2.69
Tesla (US:TSLA) 23,000 2.58
TM CRUX UK Special Situations (GB00BG5Q5X24) 20,861 2.34
Mpac (MPAC) 20,663 2.31
Baillie Gifford Long Term Global Growth (GB00BD5Z0Z54) 18,782 2.1
Thinksmart (TSL) 18,235 2.04
First Sentier Global Listed Infrastructure (GB00B24HK556) 18,190 2.04
BATM Advanced Communications (BVC) 17,805 1.99
Ramsdens (RFX) 16,809 1.88
Kromek (KMK) 16,624 1.86
Avingtrans (AVG) 15,138 1.69
Fidelity Global Special Situations (GB00B8HT7153) 14,965 1.68
Janus Henderson Global Equity (GB00B68SFJ13) 14,957 1.67
Sareum (SAR) 14,670 1.64
Venture Life (VLG) 14,018 1.57
Kape Technologies (KAPE) 13,669 1.53
Jubilee Metals (JLP) 12,633 1.41
AXA Framlington Health (GB00B6WZJX05) 12,574 1.41
BNY Mellon Global Income (GB00B8BQG486) 12,189 1.36
Artemis Income (GB00B2PLJJ36) 12,128 1.36
Xaar (XAR) 11,465 1.28
M&G Global Dividend (GB00B39R2R32) 11,425 1.28
ITM Power (ITM) 10,916 1.22
Record (REC) 10,774 1.21
Metal Tiger (MTR) 10,165 1.14
Invesco Global Equity (GB00BJ04GY03) 9,893 1.11
Jarvis Securities (JIM) 9,805 1.1
Duke Royalty (DUKE) 9,018 1.01
Novacyt (NCYT) 8,841 0.99
Invesco UK Equity Income (GB00BJ04HX60) 7,132 0.8
SRT Marine Systems (SRT) 7,080 0.79
MTI Wireless Edge (MWE) 6,884 0.77
Mission (TMG) 6,694 0.75
Ninety One UK Smaller Companies (GB00B5NR9271) 6,509 0.73
Crimson Tide (TIDE) 6,479 0.73
Xpediator (XPD) 6,332 0.71
Liontrust UK Smaller Companies (GB00B57TMD12) 6,154 0.69
Orsted (DEN:ORSTED) 6,050 0.68
Joanna workplace pension 6,000 0.67
Checkit (CKT) 5,731 0.64
Wynnstay (WYN) 5,520 0.62
Nanosynth (NNN) 5,160 0.58
Cash 5,000 0.56
Creightons (CRL) 4,706 0.53
Tclarke (CTO) 4,032 0.45
Total 893,167  




David Gibb, chartered financial planner at Quilter, says:

It would not be a good idea to take lump sums from your pensions and use them to fund your Isas. The internal tax treatment of an Isa is identical to a pension so there is no benefit in doing this.

If your workplace pension doesn’t offer suitable funds, a partial transfer to your Sipp might be a good idea. But it is very important to find out the minimum value required to keep the pension fund open and to clearly state on any paperwork that you are doing a partial transfer, as you need to keep your workplace pension open to benefit from employer contributions.

Paying into a pension to keep your net relevant UK earnings below £100,000 is very sensible. As long as you have the earnings to support the contributions, which you do, they can be funded from almost anywhere – not just surplus income and bonuses. You mentioned using tax free lump sums to fund the contributions, but if the lump sums exceed £7,500 you may fall foul of the tax free cash recycling rules.

If you are still working at the time, drawing from your husband’s Sipp would be better than drawing from yours as his Sipp money will be taxed whenever and however it is withdrawn.

The value of your pensions is about £851,000 so approaching the lifetime allowance limit of £1,073,100. You need to weigh up the value of tax relief on contributions against a potential lifetime allowance charge.

With regard to when and how to pay off your mortgage, allowing the investment funds to recover would be good but this may take more than two years and you will be paying interest during this time. So clearing the smaller mortgages may be a good idea. You could look into re-mortgaging on an interest only basis to reduce your monthly outgoings while your investments’ value hopefully recovers.

You want to reduce your allocation to direct share holdings and have more in funds to make managing your investments easier. This makes sense because keeping track of all these investments on a regular basis takes time and effort. It would also make it easier to have a good level of diversification, and spread of different geographies, asset classes and fund styles.

I suggest diversifying away a bit from pure equity plays as your portfolio is at the higher risk end. Adding a little UK and international fixed interest, and alternative investments such as property, absolute return and infrastructure funds, should reduce the volatility of the portfolio in difficult markets. Some of the alternative investments could also help your portfolio in the current inflationary environment. 

You want a total return of 5 per cent a year plus 5 per cent income but this is relatively ambitious for a balanced portfolio. 

If you invest in a lifestyle fund it is usual for the risk to be reduced as your retirement age nears. This is arguably the correct approach because your ability to bear loss reduces as you approach the end of your working life. However, it would not be advisable to reduce risk too much given life expectancy in the UK at the moment. This is particularly the case with the pensions because they could be running for around 30 plus years. Taking a reasonable level of risk should be advantageous over the longer term and help to prevent the investments from losing money in real terms. 

Baillie Gifford is a good investment house but its investment style has suffered so far this year.  Although its funds have done well over the longer term, it may be sensible to review your holdings in them and exposure to this investment house. 


Shelley McCarthy, managing director at Informed Choice, says:

As always, my overriding recommendation is get a cash flow forecast and make a financial plan. These would help you understand how sustainable your income requirements are and what level of risk you need to take, and to decide whether to repay your mortgage debt now or later.

The sooner you repay debt, the lower the overall amount of interest you pay.  A substantial part of your annual costs relate to your mortgage, but if you didn’t have these costs, you might feel less frustrated and have more disposable income.

Although you have suffered a reversal in the values of your Sipps there is no guarantee that they are going to recover by your mortgage redemption dates. How disappointed would you be if, rather than recover, the value of your Sipps fell further and the value of the tax free cash was even lower than it is today?

You also need to consider where interest rates might be at the time when you will renew your mortgages. I think that the rates available will be probably be higher than the rates that you are paying at present. This would increase your monthly expenditure further, so you may need to pay down at least some of the debt. You can often make a 10 per cent over payment each year which could also be a consideration.

There are many more mortgage options available, such as lifetime and retirement mortgages. These are often a form of equity release, but consider whether you need to repay your mortgage debt, or could afford to service it on an interest only basis or allow it to accrue. Are you likely to downsize in the future? Consider whether maintaining debt is sustainable if interest rates rise significantly.

You also have a significant personal loan. The interest rates of these are often higher than mortgage interest rates, so it may be worth repaying this first.

Based on your current pension valuations, if you made no further contributions and and they grew 5 per cent a year, their value would be likely to exceed the lifetime allowance in the next five years. So take care when considering higher contributions. You need to balance the benefit of saving on tax now against a possible charge in the future.

You don’t have to fund pension contributions from earned income but do need to be careful not to fall foul of the tax free cash recycling rules.

Whether you should make withdrawals from pensions to fund Isas comes down to risk, particularly as inheritance tax planning isn’t an issue for you. You could use these funds to repay debt. But if you do not, it probably makes sense to take withdrawals and fund Isas as this will give you scope to take higher levels of tax-efficient withdrawals in the future. It would also mean that you are tested against the lifetime allowance at an earlier point which could be beneficial. However, you need to leave enough of your lifetime allowance to ensure that your DB pension is paid in full, without deduction, at age 60. This guaranteed, indexed-linked income is likely to be a very important part of your retirement income.

I see no real benefit in leaving your pension untouched and drawing on your husband’s first. If you have lifetime allowance issues it would probably be preferable to draw from yours. If you inherit your husband’s pension this will not count towards your lifetime allowance.

Consider significantly reducing the investment risk of your husband’s Sipp in drawdown as you plan to run this down over a short time period. 


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