Updated September 2024
Money saving expert Martin Lewis offers pension advice to all ages. From those just starting out on a career path to later life planners considering how to make the most of their retirement income. He is arguably the best known financial journalist in the UK and is currently a regular face on ITV's 'This Morning' programme.
The information he provides on the Money Saving Expert website includes helpful tips on how to make your money work harder for you and risks you may face along the way. The overall aim being to save money and boost your retirement income, which is where his advice on pension drawdown could prove invaluable.
What is Martin Lewis’ pension drawdown advice?
Martin Lewis’ advice on pension drawdownis that it could help reduce the amount of tax you pay on your pension, in some cases by thousands of pounds.
When it comes to accessing your pension, you can choose one of two options:
- Withdraw the money as and when you need it – the first 25% of each withdrawal is tax free, then you are taxed on the remaining 75%. So, if you take £20,000, £5,000 will be tax free but the remaining £15,000 will be taxed.
- Opt for a pension drawdown – with this option you can take the whole of your 25% tax free allowance if you choose, then put the remaining funds in income drawdown or a pension annuity.
You can read our own guide on how an annuity compares to drawdown here.
Martin Lewis explains that the risk with simply withdrawing the money as and when you need it is that you will always pay tax on three quarters of the money you withdraw. So, if you’re a basic tax payer, 75% of the money you take with be taxed, on top of the any money you have already earnt. This could push you into the higher tax bracket which would mean paying thousands of pounds more in tax.
However, if you choose the more tax efficient pension drawdown option, you can take advantage of the whole of your 25% tax free allowance upfront, leaving the remaining funds invested until your earnings drop and you have less tax to pay.
For example, if you are currently in or close to the high tax bracket, withdrawing money using the first option will increase the tax you pay, in some cases by thousands. However, if you choose the drawdown option and only withdraw the 25%, you won’t pay any more tax. Then, by waiting until you are a lower rate taxpayer to take the remaining taxed amount, you will pay less tax overall.
Try the free pension drawdown calculator
What else does Martin Lewis advise on pension drawdown?
In addition to his tips on how to be more tax efficient, Martin Lewis offers the following advice when it comes to withdrawing your pension:
- Get pension advice if you’re confused – the government-backed Pension Wise Service from MoneyHelper offers free advice, or you can choose a specialist company, such as pensions expert Age Partnership.
- Consider how long it will be before you need to start withdrawing your pension – by trying to estimate how long you will live, you can work out how much cash you need.
How much does Martin Lewis think you should pay into your pension?
Martin Lewis advises that to work out how much you should pay into your pension, you need to take the age you start contributing to your pension, halve it, then put that percentage into your salary for the rest of your life.
So, if you are 30 years old, you should pay 15% of your salary into your pension.
He is quick to point out that this may not be affordable for some people, however the key message here is that the earlier and the more you can pay into your pension, the more comfortable your retirement will be.
For more information on pensions, visit our retirement hub.
