Martin Lewis issues warning over pension mistake that could cost you £10,000s
Martin Lewis issues warning over pension mistake that could cost you £10,000s
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Martin Lewis has issued an urgent warning for pension savers who risk losing potentially tens of thousands of pounds. You can usually take up to 25% of your pension money as a tax-free lump sum, and the rest is subject to tax based on your income tax band. But if you’re due to drop a tax band in later life, for example if you cut down your hours or days as you approach retirement, Martin Lewis explained how there is an alternative method to accessing your pension that could save you thousands of pounds in tax.
It involves taking your 25% tax-free lump sum, then putting the rest in income drawdown, which is an investment product you can take money out of when you need to, or an annuity, which pays you a set income each year for the rest of your life. This would mean the remainder of your pension pot - the part that isn’t tax-free - would be taxed at the point you access that amount of money, when you have moved down a tax bracket.
Speaking during his Martin Lewis Money Show Live broadcast on ITV, Martin said: "So why is this important? Imagine that right now you're a higher 40% rate taxpayer, and at a later date, once you retire, you're not going to have as much income. You'd be a 20% rate taxpayer.
"So you take £10,000 out right now, £7,500 of it is taxed at 40% - but if you could wait with it, it'd be taxed at 20%, so less tax would be paid. This could be £1,000s or £10,000s difference that you're unnecessarily paying. So please get guidance on that.".
Martin recommended speaking to Money Helper if you're age under 50, or Pension Wise if you're over 50, for free advice about your retirement plans. Keep in mind your private and workplace pensions are separate to any state pension that you may be entitled to.
