Bed & ISA, Bed & Pension - Why Now is the Perfect Time
Tax-Loss Harvesting: A Market Dip Silver Lining
The recent outbreak of trade tensions has sent global markets into a tailspin, leaving many investors concerned about their portfolios. But amidst this volatility lies opportunity, particularly as we enter a new tax year with fresh ISA and pension allowances—an ideal time to make strategic moves that enhance your tax efficiency.
Many will fund their ISAs and pensions with new cash. However, another popular approach for those with existing taxable accounts, such as General Investment Accounts, legacy stock certificates, or vested company shares, is to transfer funds into tax-efficient wrappers through 'Bed & ISA' or 'Bed & Pension' strategies.
These approaches are particularly powerful during market downturns. By selling investments that have fallen in value from your taxable account, you can 'harvest' these paper losses to offset against future capital gains. Simultaneously, you reinvest the proceeds into tax-free wrappers, positioning your portfolio for recovery in a much more tax-efficient environment.
What Are Bed & ISA and Bed & Pension?
These strategies involve selling investments held in a taxable account and repurchasing them within a tax-efficient wrapper (either an ISA or pension). While the primary goal is to shield future investment growth from tax, these approaches offer additional benefits, particularly in today's volatile market.
Bed & ISA Explained
The process works as follows:
You sell investments in your General Investment Account (GIA)
You contribute the proceeds to your ISA (up to your £20,000 allowance for the 2025/26 tax year)
You then repurchase the same or similar investments within your ISA wrapper
Bed & Pension Explained
This works similarly, but with one significant advantage: pension contributions qualify for tax relief at your marginal income tax rate.
For example, if you're an additional rate taxpayer wanting to contribute £10,000 (gross) to your pension:
You transfer £8,000 net from your GIA
Basic rate tax relief (20%) is claimed by your pension provider, who will automatically credit the plan with £2,000
As an additional rate taxpayer, you later reclaim a further £2,500 via self-assessment.
The total gross contribution to your pension is £10,000, but your net cost is just £5,500, an effective 45% income tax relief.
Note, thresholds, percentage rates and tax legislation may change in subsequent Finance Acts and their value depends on the individual circumstances of each investor.
Why Now Is an Opportune Time
There are several reasons why the current environment makes these strategies particularly attractive:
1. Fresh Tax Year Allowances
The new tax year started on 6th April, providing fresh ISA allowances (£20,000 per person) and pension annual allowances (up to £60,000, depending on your earnings and circumstances). By using these allowances early, you maximize the time your investments can grow tax-efficiently.
2. Market Correction Creates Tax Loss Harvesting Opportunities
For those who have invested in recent months, the current market downturn presents an opportunity to crystallise losses in taxable accounts. These losses can be carried forward indefinitely to offset future capital gains.
Here’s a worked example of the potential tax benefits.
Case Study
Following a recent inheritance, James and Juliet invested £250,000 in a single multi-asset fund at the start of the year inside their General Investment Account. Following recent market turbulence, their portfolio has lost 10%, or £25,000, leaving them with a current value of £225,000.
They decide to implement a Bed & ISA strategy:
They sell 26% of their portfolio, generating approximately £58,000.
They use these proceeds to fund:
Their own ISA allowances (£20,000 each)
Junior ISAs for their two minor children (£9,000 each)
Once the cash has settled in their ISAs and JISAs, they repurchase exactly the same multi-asset fund they sold from their GIA.
In doing so, they crystallise a loss of £6,500 (26% of the £25,000 loss), which can be carried forward indefinitely to offset future capital gains. This could save them around £1,200-1,600 in capital gains tax, further down the road.
It's important to note that while the "bed and breakfast" rules would prevent tax loss harvesting if you bought back the same investment within 30 days in your GIA, these rules don't apply when repurchasing within an ISA or pension.
3. Tax-Free Recovery Potential
By moving investments into tax-efficient wrappers now, any future market recovery will occur in a tax-free environment. Historically, markets have always recovered from downturns, and when they do, investors using these strategies will enjoy the rebound without any tax implications.
Continuing the previous example, assuming the market recovers to its original level (implying an 11.1% return from the current position):
The combined ISAs and Junior ISAs would grow to £64,000, with the entire £6,000 gain being completely tax-free, along with any associated investment income.
The residual GIA investment would return to its original cost basis with no capital gain.
Plus, James and Juliet would still have their £6,500 tax loss to use against future gains elsewhere in their portfolio.
Considerations and Potential Drawbacks
While Bed & ISA and Bed & Pension strategies offer significant benefits, there are some important considerations:
1. Time Out of the Market
Perhaps the most significant drawback is the inevitable period when your money is out of the market. The process involves selling your current position, transferring cash to the ISA or pension, and then repurchasing the investment. For fund investments, this typically takes several days as trades and cash transfers need to settle.
During this period, markets could move:
If markets rise while you're out of the market, you could miss out on potential gains.
If markets fall further, you might benefit by repurchasing at lower prices.
Given this uncertainty, we recommend implementing these strategies in phases rather than all at once, which helps mitigate the risk of unfortunate timing.
2. Transaction Costs
Factor in any dealing charges when selling and repurchasing investments. For smaller amounts, these costs might outweigh the tax benefits.
3. Pension Access Restrictions
Remember that money moved into a pension cannot be accessed until at least age 55 (rising to 57 in 2028). This strategy is, therefore, most suitable for money you won't need until retirement.
4. Investment Selection
When implementing Bed & ISA or Bed & Pension, you need to consider whether to repurchase exactly the same investments or similar alternatives. While buying the same investment in an ISA/pension doesn't trigger the 30-day "bed and breakfast" rule, there may be advantages to slightly adjusting your portfolio during this process, particularly if your existing investments don't align perfectly with your current goals or risk profile.
For instance, many investors accumulate significant holdings in their employer's shares through vesting schemes. As a general rule, having substantial personal wealth tied to the company that also provides your salary creates unnecessary concentration risk. The transfer process offers a perfect moment to diversify these holdings.
Is This Approach Right for You?
These strategies tend to be most beneficial for:
Higher and additional rate taxpayers
Those with significant investments outside tax-efficient wrappers
Investors with current losses that could be harvested for future tax benefits
Those with a long-term investment horizon
Conclusion
While market downturns can be unsettling, they also present valuable financial planning opportunities. By implementing Bed & ISA and Bed & Pension strategies early in the tax year—particularly during market volatility—you can potentially:
Shield future investment growth (when market recover) from tax
Harvest losses to offset future capital gains
We strongly advocate 'going early' with ISA and pension contributions, rather than leaving these until the end of the tax year. Given the recent market volatility, now seems a particularly opportune time to execute these strategies—not only do you get your money working for you in a tax-efficient environment sooner, but you may also benefit from purchasing assets at temporarily depressed prices.
Happy Thursday!
Important Disclaimer
This blog is for general information only and is intended for retail clients. It does not constitute financial or tax advice, nor is it an offer to buy or sell any specific investment. Since I don’t know your personal financial situation, you should not rely on this content as tailored advice. While we aim to provide accurate and up-to-date information, we cannot guarantee that all details remain correct over time. We are not responsible for any losses resulting from actions taken based on this blog’s content.
