How I used my 25% pension tax-free cash to fill two ISA allowances before April and the surprising lesson I learned about old pension protections along the way
Pensions are brilliant for building wealth. Tax relief on contributions, long-term compounding, and a generous wrapper that shelters your money for decades. But here’s something many people don’t think about until it’s too late: getting money out of a pension efficiently is just as important as getting it in.
If your pension grows large enough which is the goal, right, you could find yourself paying 40% income tax in retirement on every withdrawal above the basic-rate threshold. The pension that served you so well on the way in becomes a tax headache on the way out.
This article explains the strategy I’m using to start dealing with that problem now, not later.
Why Move Pension Money Into an ISA?
It comes down to one thing: future tax planning.
Pension withdrawals are taxable income (except for the 25% tax-free portion). That means every pound you pull out counts towards your annual income and could push you into a higher tax band. In retirement, if you’re drawing from a large pension pot, a state pension, and perhaps other income, it adds up fast.
An ISA, by contrast, is completely tax-free. No income tax on withdrawals. No impact on your income tax bands. Total flexibility.
“Sometimes the wrapper matters more than the investment itself. By gradually moving money into ISAs, you create multiple income sources in retirement which makes tax planning dramatically easier.”
The strategy, then, is to use the tax-free cash (TFC) from your pension the portion you can withdraw without any income tax and move it into an ISA before the end of the tax year.
The 25% Tax-Free Cash – Explained Simply
If you’re new to this, here’s the quick version. From age 55 (rising to 57 in 2028), you can normally withdraw 25% of your pension pot completely tax-free. The remaining 75% is taxable when withdrawn.
You don’t have to take it all at once. You can take it in chunks over time, which is exactly what this strategy is built around.
| Wrapper | Tax on contributions | Tax on growth | Tax on withdrawal |
|---|---|---|---|
| Pension | None (tax relief) | None | Yes, as income |
| ISA | From after-tax income | None | None |
| General Investment Account | From after-tax income | CGT / Dividend tax | CGT applies |
The insight here is that your pension’s 25% tax-free cash is a one-time bridge. It lets you extract money from the pension without a tax hit and if you route that cash into an ISA, it can then grow and be withdrawn tax-free forever.
My Tax Free Cash Dilemma
My personal dilemma I’m weighing is, I have 490K in a SIPP by crystallising £160k now, I’ve used up 25% TFC entitlement on that slice. But I still have £330k sitting uncrystallised, so its 25% TFC (£82,500) is preserved and continues to grow with the pot.
The maths on partial crystallisation:
| SIPP/Event | Amount |
|---|---|
| Total SIPP | £490,000 |
| Crystallise now | £160,000 |
| TFC taken (25%) | £40,000 → ISA |
| Into drawdown | £120,000 |
| Remaining uncrystallised | £330,000 |
| Future TFC still available on that £330k | £82,500 |
The Graph option makes it clearer
My Plan £40,000 Into Two ISAs
Here’s how the numbers work in practice. This year, the plan is to withdraw £40,000 of tax-free cash from the pension
- Withdraw £40,000 as pension tax-free cash No income tax due this comes from the 25% tax-free allowance.
- Put £20,000 into my ISA Uses my full annual ISA allowance for this tax year.
- Put £20,000 into my partner’s ISA Uses their full annual ISA allowance too doubling the tax-free shelter.
✅ Why This Works
- £40,000 moves from a taxable wrapper (pension) to a tax-free one (ISA)
- Both annual ISA allowances are fully used before the 5 April deadline
- Future growth and withdrawals on this money are now permanently tax-free
- A lower pension balance means a reduced risk of 40% tax in retirement
Crucially, the investment strategy stays the same global equity index funds, S&P 500 exposure but the tax wrapper changes. That’s often the most powerful lever available to UK investors at this stage of the journey.
Why Timing Before April Matters
The UK tax year ends on 5 April. If you don’t use your £20,000 ISA allowance before then, it’s gone. You cannot carry it forward to the next year.
For anyone who has just reached pension access age, this creates a narrow window. The longer you wait in the tax year, the more likely you are to miss it. Getting the money in early also means:
- More tax-free growth Money inside an ISA starts compounding tax-free sooner.
- Protection from rule changes Pension tax rules have changed before and may change again. Money inside an ISA is sheltered from future pension-specific policy shifts.
- More flexibility later An ISA gives you the option to withdraw without affecting your income tax position — useful for managing income in retirement.
The Pension Surprise: Protected Benefits
One of the most eye-opening parts of this process was discovering protected pension benefits in an old scheme.
Many older pensions particularly those set up before 2006 can contain special protections that most people have no idea are there. These can include:
Section 32 Buy-Out Policies
Old contracted-out occupational pensions moved into individual plans. Can contain guaranteed annuity rates worth significant sums.
Protected Tax-Free Cash
Some older pensions allow more than 25% tax-free. If the pension predates April 2006, the TFC could be considerably higher.
Protected Retirement Ages
Some schemes allow access from age 50, before the current minimum of 55 (rising to 57). Transferring away can lose this.
Enhanced Transfer Values
Some defined benefit schemes offer extra incentives to transfer out. These need very careful scrutiny — and often regulated advice.
In my case, the old Aegon pension had protections that required a financial adviser to unlock. The adviser fee would have been around £3,000 and the additional benefit over a standard transfer was only around £3,500. After weighing up the net gain, the decision was made to transfer and lose the protection rather than pay for a marginal extra benefit.
⚠️ Important: This was a personal decision based on specific numbers. Your situation will be different. Always check what protections exist in any old pension before transferring or making withdrawals. Some protections are worth far more than the cost to unlock them.
Pension vs ISA: It’s Not Either/Or
If you’re earlier on the FIRE journey and wondering which to prioritise, the honest answer is: both have a role, and combining them is the point.
| Pension Strengths | ISA Strengths |
|---|---|
| Tax relief on contributions (20%–45% back) | Completely tax-free withdrawals |
| Employer contributions (free money) | No impact on income tax calculations |
| Long-term compounding in a sheltered wrapper | Access at any age no minimum access age |
| Outside estate for inheritance tax purposes | Simple, flexible, no annual limits on withdrawals |
The ideal FIRE scenario is to build both simultaneously, then in later years once pension access opens gradually shift some of the pension’s tax-free cash into the ISA. This creates a diversified tax position in retirement: some income from the pension (using up the basic-rate band efficiently), and tax-free ISA withdrawals to top up without a tax penalty.
Key Lessons From This Process
A few things were genuinely surprising along the way that are worth flagging for anyone considering this approach:
Not all pensions offer the same 25%
Older schemes can have different rules, restrictions, and protections. Never assume the standard rules apply until you’ve checked.
Adviser fees have changed
Many advisers now charge percentage-based fees, which can slowly erode returns over time. Always understand the full cost.
Running your own projections matters
This strategy emerged from modelling numbers in a retirement calculator — not from advice. Knowing your own numbers is powerful.
Old schemes hide valuable details
Protected benefits, guaranteed annuity rates, early access rights. They’re worth finding before doing anything else.
“The biggest lesson: understand your pension before making changes. Old schemes often contain hidden details that can dramatically change the best strategy.”
Is This Right for You?
This strategy won’t suit everyone. It requires having reached pension access age and having enough pension value to make the withdrawals worthwhile. It also depends on your personal income tax position — if you’re already in a low tax band in retirement, the urgency is different.
But for anyone on a FIRE path who has a significant pension and wants to reduce future tax exposure, the core idea is sound:
- Model your retirement income Use a pension calculator to project whether your pension could push you into higher-rate tax at retirement age.
- Check all old pensions for protections Before doing anything, understand what you have. Phone the provider, ask specifically about protected benefits.
- Take tax-free cash gradually There’s rarely a need to take it all at once. A drip-feed approach means you can fill ISA allowances each year.
- Use both ISA allowances if you have a partner This doubles the amount you can shelter each tax year — £40,000 combined at current allowances.
This article is for informational purposes only and does not constitute financial advice. Tax rules can change, and your personal circumstances will affect which strategies are appropriate. Consider consulting a qualified financial adviser before making decisions about pension withdrawals or transfers.