Martin Lewis gives pensions ‘tax trap’ alert with | European Markets

Cash saving skilled Martin Lewis has delivered a stark warning on ITV, highlighting that a grave blunder may very well be made by pension savers paying hefty tax by withdrawing their funds too early.

Mr Lewis make clear the ramifications of a coverage launched by former chancellor George Osborne, which permitted people to entry their pension pots at 55—a choice now shrouded in considerations about retirement security.

At the moment raising alarm bells, Mr Lewis identified the upcoming modifications stipulating that from April 2028, the age requirement shall be elevated to 57. He stated: “Near retirement? There’s a huge tax trap to avoid when withdrawing from a pension.

“In the event you do do that, it might probably cut back what you’ll be able to put in later as soon as you are taking the income. Now 25% of the money that you simply take out is tax free. The remainder is taxed at your marginal fee. What does that imply? It means when you’re a fundamental fee taxpayer, of course there’s at all times a bit you do not pay tax on, your personal allowance, nevertheless it’s 20%. In the event you’re a greater fee taxpayer, it is 40%. That is what you are going to be taxed on.”

Mr Lewis then clarified the common misconception regarding withdrawals, asserting: “So when you take £10,000 out of your pension fund, £2,500 of that shall be tax free. And the remaining £7,500 of it… you’ll pay tax on at your marginal fee that tax yr. So you’ll be able to’t simply take all of it out tax-free.”

The financial expert highlighted a savvy method for accessing pension funds, explaining: “There may be an different approach of doing it. In the event you take 25% out and put the remaining in an income drawdown or annuity you’ll be able to select to only take 25% tax free and depart the remaining in an annuity or an income drawdown in order that it’s taxed on the level you entry that quantity of money.”

He continued to stress the importance of this strategy: “So why is that this important? Nicely, let’s distinction it right here. Transfer on, please. Right here you go. In the event you simply take it out, think about that proper now you are a greater 40% fee taxpayer. And at a later date, when you retire, you are not going to have as a lot income, you would be a 20% fee 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.”

He added: “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.”

He concluded with a robust suggestion: “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.”