Martin Lewis says ‘use pension like a bank account’ in tax loophole

Martin Lewis has shared important advice for savers on the latest episode of his podcast. The financial expert welcomed a number of fan questions on all sorts of tax types, exemptions and allowances.

The podcast including discussion on personal savings allowance, income tax threshold and the starting savings rate which, when all combined, can see some Brits taking home £18,570 tax-free through a combination of earned income, interest and savings income. Not bad.

One listener, Angus from Derby, called in for a technical question over the starting rate for tax on savings as he retired before his state pension is due to kick in and was debating how to fund his lifestyle best to avoid tax until it begins. With the intricacies of the starting rate explained, Angus shared one loophole he had found in his research that Martin hadn’t mentioned yet.

Speaking of the personal savings allowance and tax-free savings interest allowance, he said: “When you start drawing down from your pension you can take out the £12,570 times four over three which is below the £17,570. So over a year, assuming that’s your only income. You’ll get more than just the straight £1,000 which I don’t think is very obvious.”

The question seemed to startle Martin and his panel of experts on the The Martin Lewis Podcast as tax guru Rebecca Benneyworth weighed in to say: “So you’re drawing more than £12,570… but you’ve still got scope for savings income. You’re right.”

Martin added: “Are you saying you’re taking money out of your pension altogether, so three quarters of it is taxable and a quarter of it is tax free?” When Angus confirmed this, the Money Saving Expert said: “That only works in the situation when you’re using your pension like a bank account. Most people don’t do it that way.”

Explaining another way savers could get a similar allowance, Martin said: “Remember, you could equally do it, if you’re in a draw down, take the entire 25% tax-free." He was referring to the allowance offered on lump sums taken from approved pension pots, not including state pension.