Martin Lewis is warning over-55s about costly tax mistakes
Martin Lewis has issued a warning to people aged 55 and over about costly errors that can occur when accessing their pension pots for the first time.
The money-saving expert has cautioned that numerous people mistakenly believe they can withdraw 25 per cent of their pension tax-free without triggering any further tax implications. In the latest MoneySavingExpert newsletter, Martin explained that while 25 per cent of pension withdrawals are typically tax-free, the remainder may still be subject to income tax and could potentially push individuals into a higher tax bracket.
According to the Daily Record, he also issued a warning that certain pension withdrawals can inadvertently reduce the amount people are permitted to contribute to their pensions going forward. Martin stated: "Withdraw money directly from your pension and only 25 per cent of what you take will be tax free, the rest taxable.
" The finance guru also drew attention to complications arising from emergency tax rules implemented by pension providers when individuals withdraw taxable funds from their pension for the very first time. He outlined that pension providers might implement a temporary 'Month 1' emergency tax code, which could lead to individuals initially paying considerably more tax than they're actually liable for. Martin clarified: "Your provider may use an emergency 'Month 1' tax code.
This can tax the payment as if you'll get the same amount every month, so a big one off or irregular withdrawal could mean a much bigger tax charge.
" While excess tax paid can typically be recovered from HM Revenue and Customs , Martin recommended making smaller withdrawals or distributing payments throughout the tax year to minimise the likelihood of overpaying. The warning relates to defined contribution pensions, also referred to as money purchase pensions, where employees accumulate a pension fund through contributions and investments. Martin additionally cautioned that once an individual accesses taxable funds from their pension, they may activate the Money Purchase Annual Allowance .
This cuts the sum most individuals can pay into their pension each year while still qualifying for tax relief, dropping from £60,000 to £10,000. Nevertheless, he explained that specific exemptions exist. Taking only the tax-free portion of a pension doesn't ordinarily activate the reduced allowance, nor does purchasing a standard lifetime annuity with pension savings. Martin further highlighted that individuals can typically withdraw up to three pension 'small pots' valued at £10,000 or below without affecting future pension contribution thresholds.
He urged individuals to seek free guidance before making any decisions regarding pension withdrawals. Those aged over 50 can arrange a no-cost appointment with Pension Wise, while younger savers can access support through MoneyHelper. Martin also highlighted that those with more substantial pension pots may benefit from obtaining paid independent financial advice, in order to avoid potentially costly errors. The full guide on how to withdraw your tax-free lump sum from your pension pot is available on MSE.com.
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