Martin Lewis warns people face 'tax trap' when withdrawing pension

Martin Lewis has urged people to understand the "big thing" when it comes to pensions. The BBC Sounds podcast host, speaking on his spin-off podcast show, warned UK households and pension pot holders to ensure they are spending it "tax free."

Mr Lewis was talking to pensions expert Charlotte Jackson, of the Pension Wise advice service. He said: “The big thing to understand when it comes to taking money out of your pension when you’ve got a pot of money built up, a lot of what’s worth thinking about is tax.

“You generally get 25 per cent of the money in your pension tax free, and the rest is taxed. But what counts and when it’s taxed is when it gets complicated.” He said: “Most of the roll is sponge and you have your luxury jam bit in the middle.

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"Well the sponge is the taxable part of your pension and the jam running through the middle, that’s your tax free amount. Now if you take your money out of your pension using it like a bank account, you get a slice of the swiss roll. And that swiss roll contains whatever amount you’ve taken from your pension, 25 per cent of it is tax free, and 75 per cent of it is taxed at your marginal rate, whatever income tax rate you’re paying.”

Martin continued: “But if you do what’s called a draw-down or annuity then you can just take the jam, you can take 25 per cent of your pension totally tax free and you’re paid the rest via the draw down or annuity later when you take it.”

He added: “This allows you to control when you pay the tax on your pension pot. If later on in life you become a non-taxpayer, you take the rest out when you’re a non-taxpayer, you get a 25 per cent lump sum now, and then when you take the rest of the money out even though it’s taxable, because you’re a non-taxpayer, it would be better for you.”