Milner is out of contract this summer at City and is reported to be in talks with other Premier League clubs, with both Arsenal and Liverpool – according to Sky Sports - said to be interested in landing the midfielder.
Pellegrini is quoted by Sky Sports, saying: "It's a decision James must take at the end of season, what is better for his future.
"I always talk that he is an important player for our team, he can play in different positions because he is an intelligent player.
"He always gives 100% but it will be sorted at the end of the season.
"I can think (staying at Manchester City) is best him for him but it's important what he thinks."
Pellegrini went on to describe Milner as an important player for the club, but he has rarely been used in his preferred central midfield role, which is said to be one of the reasons why he hasn't signed a new deal at the club where he has won two Premier League titles.
Liverpool have been the side most strongly linked with a move for Milner as they look to rebuild for next season, with Steven Gerrard departing the club this summer for MLS and the side looking to target an instant return to the Champions League.
Arsenal could also attract the midfielder after back-to-back FA Cup triumphs, plus they have the lure of Champions League football, while Liverpool can only offer the Europa League. One thing that could work in the Reds' favour, howver, is that there would be no need for Milner to move house, given how close Liverpool and Manchester are - in terms of geography at least.
It will be an interesting story to follow, but whoever Milner commits his future to, it could prove to be a big coup for them.