Martin Lewis issues warning over taking out 25 per cent tax-free lump sum

Martin Lewis issues warning over taking out 25 per cent tax-free lump sum
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Martin Lewis has issued a warning against a crucial pension mistake as he shares his top tips for savers. The BBC Sounds star and ITV regular has issued a “tax warning” to pension savers, using his latest episode on Tuesday night to air a pensions special.

On the tax free lump sum, which can be withdrawn at age 55, Mr Lewis said how and when you take the money is important, and could cost savers dearly if they “get it wrong." You can take your 25 per cent tax-free lump sum and put the rest in income drawdown, Mr Lewis said.

This is an investment product that you can take money out of when you need to. Alternatively, the Money Saving Expert founder said you could opt for an annuity, which pays you a set income each year for the rest of your life.

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This would mean that the remainder of your pension pot (which isn’t tax-free) would be taxed at the point you access the money, which may be after you have moved down a tax band. The 52-year-old said: "So why is this important? Imagine that right now you're a higher 40 per cent rate taxpayer, and at a later date, once you retire, you're not going to have as much income. You'd be a 20 per cent rate taxpayer.

"So you take £10,000 out right now, £7,500 of it is taxed at 40 per cent - but if you could wait for it, it'd be taxed at 20 per cent, 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."

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Mr Lewis said: “Nearly three million pensions are thought to be ‘lost’, often these are worth £10,000 - this is not trivial money. So, try contacting your ex-employer if you know who they are and digging out your paperwork if you can.

“If not there are a number of pension tracing services, an easy one is the Pension Tracing Service tool on gov.uk, it can list over 200,000 pension schemes.” Mr Lewis also has a rule of thumb for putting money away, adding: “Take the age you start a pension and halve it.

"Then aim to put this per cent of your pre-tax salary into your pension each year until you retire.” He says that “the real takeaway is start as early as possible with whatever you can, as you’ve longer for the gains to compound.”