Private pension v Cash ISA

EllieJ143

Hello, advice needed please.

I have approx 25k in a private pension which hasn’t had anything added to it in 2 years, I also have about 9k in an account with Trading 212, this gets 3.6% AER. My head spins trying to work out if keeping the private pension where it is is best or taking it out and putting it in an ISA, I know I can have 25% tax free if I take it out, but does the tax on the rest negate the advantages of the interest from an ISA….

I get the state pension plus earnings from doing part time temporary assignments usually on minimum wage.

(Sorry if this isn’t clear, I’m not sure how to do it better)

Thank you in advance

Exodi

Presumably the £25k in your private pension is invested and not sitting as cash? This will mean that you will likely have benefited from investment returns over the past couple of years, likely more than the 3.6% AER your Cash ISA is returning (though you will need to check performance as it depends what you are invested in).

Investments usually provide higher returns but come with risk as they go up and down. Savings usually provide lower returns, but without the risk of it going down.

You generally wouldn't take money out of investments to put them into a savings accounts, for the purpose of maximising returns - usually the opposite.

Generally people might consider moving cash from their pension to an ISA if they are able to do so at a lower tax rate than they anticipate they will be paying in the future, or in preparation of expenses in the short to medium term, or to reduce risk.

For example, if you had a generous DB scheme paying £50k per year (we can dream) you were expected to start receiving in a couple of years, then you might want to try get your private pension money out now at ~20% tax, instead of waiting to pay ~40% tax taking it out in the future.

dunstonh

My head spins trying to work out if keeping the private pension where it is is best or taking it out and putting it in an ISA, 

Pensions typically use investments. Investments typically outperform cash. You can hold cash in a pension, but you would only really use cash if it's money that will be spent in the next 5 years.

I know I can have 25% tax free if I take it out, but does the tax on the rest negate the advantages of the interest from an ISA….

You seem to be ignoring the advantages of tax-free growth in the pension. (no tax on interest, no dividend tax, no capital gains tax)

Typically, you would not draw from a pension to stick it in a bank account unless there is strong justification for doing so as without justification, it would be the wrong thing to do.

Indeed, moving money from your Cash ISA to the pension is likely to be the better option as pensions are more tax efficient than ISAs.

Yorkie1

Without wishing to ask personal questions, are you old enough to withdraw funds from your pension? Usually you need to be 55 (soon rising to 57, I think).

HedgehogRulez

https://forums.moneysavingexpert.com/discussion/comment/81930179#Comment_81930179

given they’re in receipt of state pension I would imagine so

Yorkie1

https://forums.moneysavingexpert.com/discussion/comment/81930314#Comment_81930314

Oops, indeed!! 😁

masonic

On the off-chance you do come back to read replies, the pension has had tax relief at least at the basic rate when you paid into it, so the 25% tax free portion ensures you are better off paying basic rate tax on part of it than if you'd just put that money in an ISA in the first place.

Assuming your other income consumes your personal allowance, which seems likely, then there is no benefit to moving it from the pension wrapper, paying the necessary tax, and putting it into the ISA. You may as well pay that tax when you actually need the money.

Conversely, there may be an advantage to making pension contributions using your ISA so that you get more of that 25% tax free part. So perhaps you need to think about this the other way around.

Of greater importance is what your private pension is invested in, and is this appropriate for your current needs.