25% tax free in an ISA

Sharkb0y

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?

Rodders53

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 So will erode the value of the withdrawn money over time.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

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)

SVaz

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 .

Albermarle

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.

Newbie_John

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 So will erode the value of the withdrawn money over time.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

Newbie_John 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.

Doctor_Who

Marcon said:

Newbie_John 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. 

Sharkb0y

Some good points here, appreciate the advice. I'm 56 years old and thinking of retiring in the next few years (hopefully!)