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25% tax free in an ISA

I'm wondering whether to take my 25% tax free lump sum from my pension pot and reinvest in a fixed ISA?
ISAs are available up to 5.5% which is a better return than my current pension performance. 
Thoughts on this?

Comments

  • 5.5% is less than inflation. So will erode the value of the withdrawn money over time.  Cash savings seldom (never?) keep pace with inflation.

    Pension investment in the long term is likely to match/exceed inflation; but may be subject to short-term setbacks, such as is happening currently.

    Don't do it.
  • dunstonh
    dunstonh Posts: 118,574 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    ISAs are available up to 5.5% which is a better return than my current pension performance. 
    Its likely it was higher than 2022 returns but YTD 2023 returns should be tracking higher than the cash ISA and we dont know what is going to happen next.

    Every year in isolation, a different investment asset class will be best.  2022 cash was best.  However, cash is usually only best in around 1 in 5 years.    So, you would be making an important decision (to crystallise your pension) on the basis of a 20% chance of it being the best thing to do (when looking a single year - when multiple years are considered, the odds drop further)

    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • SVaz
    SVaz Posts: 380 Forumite
    100 Posts First Anniversary
    It depends on :
    a.  How big a lump sum
    b. when you plan to use the cash.
    Under 5 years then probably not a bad idea.
    Over 10 years,  keeping it invested is probably better .


  • SVaz said:
    It depends on :
    a.  How big a lump sum
    b. when you plan to use the cash.
    Under 5 years then probably not a bad idea.
    Over 10 years,  keeping it invested is probably better .


    Sensible advice in bold above.
    Also remember your pension will remain invested after you retire so could be looking at a 30 Year + time frame.
  • Rodders53 said:
    5.5% is less than inflation. So will erode the value of the withdrawn money over time.  Cash savings seldom (never?) keep pace with inflation.

    Pension investment in the long term is likely to match/exceed inflation; but may be subject to short-term setbacks, such as is happening currently.

    Don't do it.
    Well, I disagree here, based on assumption to never keep all eggs in one basket.
    5.5% is less than inflation now, but soon may not be.
    Also, pension is the long time investment - true, but in the next 5 years it may be below 5.5% return - so by withdrawing 25% you still keep 75% there (for longer term) and spread the risk in other places.
    Depending on how much is 25% you could put it in various places - some to your 5.5% ISA, some to Premium Bonds etc.
  • Marcon
    Marcon Posts: 12,969 Forumite
    Eighth Anniversary 10,000 Posts Name Dropper Combo Breaker
    Rodders53 said:
    5.5% is less than inflation. So will erode the value of the withdrawn money over time.  Cash savings seldom (never?) keep pace with inflation.

    Pension investment in the long term is likely to match/exceed inflation; but may be subject to short-term setbacks, such as is happening currently.

    Don't do it.
    Well, I disagree here, based on assumption to never keep all eggs in one basket.
    5.5% is less than inflation now, but soon may not be.
    Also, pension is the long time investment - true, but in the next 5 years it may be below 5.5% return - so by withdrawing 25% you still keep 75% there (for longer term) and spread the risk in other places.
    Depending on how much is 25% you could put it in various places - some to your 5.5% ISA, some to Premium Bonds etc.
    Eggs aren't all in one basket unless OP is holding all their savings in just one fund with the pension provider in question. Investing in a range of different funds spreads the risk perfectly well. Nothing to stop OP switching funds within the pensions wrapper and changing the risk/return profile that way.
    Googling on your question might have been both quicker and easier, if you're only after simple facts rather than opinions!  
  • Marcon said:
    Rodders53 said:
    5.5% is less than inflation. So will erode the value of the withdrawn money over time.  Cash savings seldom (never?) keep pace with inflation.

    Pension investment in the long term is likely to match/exceed inflation; but may be subject to short-term setbacks, such as is happening currently.

    Don't do it.
    Well, I disagree here, based on assumption to never keep all eggs in one basket.
    5.5% is less than inflation now, but soon may not be.
    Also, pension is the long time investment - true, but in the next 5 years it may be below 5.5% return - so by withdrawing 25% you still keep 75% there (for longer term) and spread the risk in other places.
    Depending on how much is 25% you could put it in various places - some to your 5.5% ISA, some to Premium Bonds etc.
    Eggs aren't all in one basket unless OP is holding all their savings in just one fund with the pension provider in question. Investing in a range of different funds spreads the risk perfectly well. Nothing to stop OP switching funds within the pensions wrapper and changing the risk/return profile that way.
    Indeed - there have been several threads over the past few months where people have switched pension investments from equity to money market funds. I hold some of my SIPP in a short term money market fund, but that is because I will be withdrawing this money over the next 2-3 tax years; the majority remains invested in equity. 
    'Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it' - Albert Einstein.
  • Some good points here, appreciate the advice. I'm 56 years old and thinking of retiring in the next few years (hopefully!)
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