What is ISA Bridging?
An "ISA bridge" is an increasingly popular financial strategy among UK residents aiming for early retirement. It involves using savings held within an Individual Savings Account (ISA) to support living costs during the period after ceasing work but before pension funds become accessible — typically between ages 55 and 57 (and rising to 58 from 2028).
This approach can offer tax-efficient income, flexibility, and greater control over retirement timing, but it also requires careful planning.
How Pension Access Ages Impact Retirement Planning
Currently, individuals can access private pensions, including workplace defined contribution pensions and Self-Invested Personal Pensions (SIPPs), from the age of 55. However, this minimum pension access age will rise to 57 in 2028, aligning broadly with the State Pension age minus ten years.
This change means that people who aim to retire at, say, 55, will face a two-year gap before pension pots become available — requiring an alternative source of income.
This is where ISA bridging becomes crucial.
How an ISA Bridge Works
ISA bridging involves accumulating sufficient funds within an ISA during your working life so that you can draw on these savings once you stop working, bridging the financial gap until pensions are accessible.
Key points include:
- Saving while working: Maximise ISA contributions during your working years.
- Drawing during early retirement: Use ISA withdrawals to cover living costs during the gap.
- Transitioning to pensions: After reaching pension access age, you can switch to pension withdrawals.
Withdrawals from ISAs are completely tax-free, providing a significant advantage over taxable pension income.
Example Scenario: Planning an ISA Bridge
Imagine Anna, who plans to retire at 55:
- Annual living expenses: £25,000.
- Pension access age: 57.
- Bridging period: 2 years.
Anna will need £50,000 in savings to cover the two-year gap.
If she contributes £20,000 per year (the current annual ISA limit for the 2025/26 tax year) and achieves modest investment growth, she could accumulate this target over a few years before retirement.
This approach allows Anna to retire on her own terms without waiting for her pension.
Types of ISAs Suitable for Bridging
Depending on how long you have before retirement, you might choose different ISA types:
Cash ISAs
- Suitable for those close to retirement.
- Capital is protected, but returns are typically low (around 4-5% interest rates in 2024/25).
- Inflation risk could erode real value.
Stocks & Shares ISAs
- More suited to longer-term horizons (5+ years).
- Potentially higher returns but with investment risk.
- Good option for younger workers planning far ahead.
Lifetime ISAs (LISAs)
- Allow saving up to £4,000 per year, with a 25% government bonus.
- Accessible at age 60 without penalty — not ideal for bridging between 55-57, unless carefully structured.
Tip: Some early retirees use a combination of Cash ISAs and Stocks & Shares ISAs to balance stability and growth.
Planning Your ISA Bridge: Step-by-Step Guide
- Set Your Retirement Date
Decide at what age you aim to retire and understand when you can access your pension. - Estimate Bridging Costs
Work out how much you will need per year to live comfortably without working. - Review Your Current Savings
Check how much you have saved in ISAs already and the gap you need to fill. - Maximise Your ISA Contributions
Each tax year, contribute as much as possible towards your ISA to take advantage of the £20,000 limit. - Investment Strategy
Adjust your risk exposure based on your timeframe. For those retiring within five years, it's wise to de-risk investments gradually. - Monitor Progress
Annually review your ISA balances and investments to ensure you are on track. - Plan Your Drawdown Strategy
Decide how you will access your funds — e.g., lump sums or monthly withdrawals.
Risks and Considerations
Inflation
Over a bridging period of two to three years, inflation could have a meaningful impact, especially if savings are held in cash. Strategies to manage inflation include:
- Keeping some funds in low-volatility, inflation-linked investment funds.
- Laddering Cash ISA accounts to lock in better fixed rates.
Investment Risk
Those using Stocks & Shares ISAs must accept the risk of short-term volatility. Diversification and a conservative asset allocation approaching retirement are critical.
Future Changes in Tax Rules
Although ISAs are currently tax-free, future governments could change legislation. It is important to remain flexible and regularly review plans.
Opportunity Cost
Building up a large ISA balance may mean less money invested in pensions, which benefit from tax relief on contributions. Balancing both pensions and ISAs is key.
ISA Bridging vs Pension Flexibility: Which is Better?
Some retirees wonder if it is better simply to rely on pension flexibility (drawing a 25% tax-free lump sum and regular withdrawals).
Advantages of an ISA bridge:
- Full flexibility and instant access.
- No tax due on withdrawals.
- Potential to control taxable income more carefully — valuable for tax planning (e.g., minimising income tax or avoiding losing personal allowance).
Pension flexibility benefits:
- Pension contributions receive tax relief.
- Funds grow tax-free.
- Death benefits: pensions can often be passed on free of inheritance tax.
For many, the best strategy is a combination of pension flexibility and ISA bridging to maximise tax advantages across different sources.
ISA bridging is a flexible, tax-efficient method for achieving early retirement in the UK. By carefully building your ISA savings ahead of retirement, you can secure your lifestyle during the critical years before pension access — enjoying greater freedom, security, and peace of mind.
