By Alanah Khosla for Mailonline
16:46 June 18, 2024, updated 16:49 June 18, 2024
Martin Lewis has warned against withdrawing money from a pension, saying it is “one of the biggest mistakes you can make if you get it wrong”.
The British money-saving expert, 52, from Manchester, spoke about the topic on today’s episode of This Morning.
A pension is a tax-efficient retirement savings fund that employees and their employer can contribute money to.
‘Taking money out of your pension is one of the biggest mistakes you can make if you make a mistake; “It could cost tens and thousands of pounds that you won’t be able to recover,” Martin warned.
During the programme, Martin used a Swiss jam roll analogy to explain why withdrawing cash from pensions can be problematic.
In 2015, pension freedom allowed anyone over 55 to withdraw money from their pension.
“Since they introduced what’s called pension freedom, you can have your pension like a bank account,” Martin said.
While unlikely, if one wanted to withdraw the entire amount of their savings at once, the first 25 percent is tax-free and the remaining 75 percent is taxed as income.
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However, using his Swiss roll analogy, Martin explained why it might not be the smartest route.
“The jam in my Swiss roll is the tax-free amount, and the cake is the taxed amount in savings,” Martin explained.
He continued: “If you just take it (the jam) out of the bank account, what happens is like taking a slice of Swiss bread, you can’t just take 25 percent (the jam),” but you also get some cake . .
Since you take a slice of the Swiss roll with jam and sponge cake, “25 percent is tax-free and the rest is taxable,” Martin said.
He continued: “So if you take out £10,000, £2,5000 is tax free and £7,500 is taxable.”
Martín explained that there are three alternatives. First, he can take 25 percent tax-free and buy an annuity, which will give him a guaranteed income for the rest of his life.
Or you can take 25 percent tax-free and then take an income drawdown on the remaining balance, “a drawdown is just another form of investment,” Martin said.
He added, “That way, you can get 25 percent tax-free and you can leave the rest in your retirement or annuity for later.”
Martin went on to explain why this is a better option. ‘Let’s say you’re still working when you withdraw money and you’re a twenty percent taxpayer.
‘If you have withdrawn £10,000, £7,500 will be subject to 20 per cent tax. Alternatively, you could take 25 percent tax-free and leave the rest invested until you stop working and are no longer a taxpayer.
“So, you’re in a lower bracket and you take the amount, (but) even though it’s taxable, you’re not a taxpayer, (therefore) it’s tax-free for you.”
It comes after Martin Lewis revealed how holidaymakers can get the cheapest Easyjet flights by 2025 – but they will have to be alert.
The founder of Money Saving Expert told his 2.9 million followers on Twitter that the airline has launched ticket sales from March to June 2025 and that to have the best chance of getting a bargain, it is best to act quickly.
He wrote: ‘Just heard that Easyjet will be launching their flights from March to June 2025 tomorrow (Tuesday) from 6am.
‘Bagging them out when they start (something like updating your browser) is often (without warranty) the way to get them at the cheapest possible price.
‘Flights can cost £100 even after a couple of hours of morning launch. So if you are going to book, try in advance.
He added: “PS: Cheapest possible doesn’t necessarily mean cheap, check what a decent rate is before you book.”
Easyjet says tickets can be booked now for departures until June 15, 2025.
The airline advertises 108 destinations from London Gatwick, with deals including flights to Ibiza from £20.99, Amsterdam from £23.99 and Lanzarote from £35.99.
As a general rule, as the date of a flight approaches and more seats are sold, prices rise.
Cheapair.com revealed that fares change 49 times on average and change by an average of £34 each time.
The California-based firm urges waiting passengers to book flights that take off midweek.
The site said: ‘Midweek flights (Tuesdays and Wednesdays) almost always offer the best value for money. Traveling mid-week should always be a consideration for the budget-minded buyer.’
He added: “Flying on Wednesday will save you almost $100 (£80) compared to Sunday, the most expensive day to fly.”
Does clearing browser history make any difference? Cheapair.com is unequivocal that the theory that clearing your browsing history will magically show you the lowest flight prices is a myth.
The site said: “Airlines don’t track your searches so they can raise their prices the next time you come.”
