Martin Lewis issues £10,000 warning over pension rule dating back to 2014
Martin Lewis has issued a warning over a pensions rule brought in back in 2014. Mr Lewis was speaking out about the changes which were brought in by then-chancellor George Osborne, a Conservative Party chancellor, to allow people to take money out from the age of 55 back in 2014.
Speaking out on his ITV show this week, the 52-year-old Money Saving Expert founder Mr Lewis warned: “If you do do this, it can reduce what you can put in later once you take the income. Now 25% of the money that you take out is tax free.
"The rest is taxed at your marginal rate. What does that mean? It means if you’re a basic rate taxpayer, of course there’s always a bit you don’t pay tax on, your personal allowance, but it’s 20%. If you’re a higher rate taxpayer, it’s 40%. That’s what you’re going to be taxed on.”
READ MORE: DWP urges state pensioners born before 1959 to come forward for quick and free £13,170
READ MORE: DWP sending letters to 60,000 people from Saturday 'demanding action'
READ MORE UK warned February 'snow events' looking more likely and could be days away
He said: “So if you take £10,000 out of your pension fund, £2,500 of that will be tax free. And the remaining £7,500 of it... you will pay tax on at your marginal rate that tax year. So you can’t just take it all out tax-free.”
He added “There is an alternative way of doing it. If you take 25% out and put the rest in an income drawdown or annuity ou can choose to just take 25% tax free and leave the rest in an annuity or an income drawdown so that it is taxed at the point you access that amount of money.
“So why is this important? Well, let’s contrast it here. Move on, please. Here you go. If you just take it out, 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 your £10,000 out right now, your £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.
“But if you do it this way, you can take all the tax-free, all the jam, all the sugary sweet, lovely bit out now. And you can wait until later on when your income drops down and you’re not as high a rate taxpayer to take the rest out so that you’d only be paying tax at 20%, not 40%, the same would work if you’re dropping from 20% to a non-taxpayer or higher.
“So the advantage of doing it this way is especially strong for those people who may pay tax, income tax at a lower rate later on because they have less income. And you can see why I’m saying you get this wrong, this could be thousands or tens of thousands of pounds difference that you’re unnecessarily paying, so please get guidance on that.”