Martin Lewis warns of a tax trap that could cost you £10,000s off your pension – MoneySavingExpert

by MoneySaverExpert

Martin used this graphic showing his Swiss roll and sponge cake analogy to explain how pensions are taxed. (Note that the Pensions Advisory Service’s webchat is now open 9am-6pm Monday to Friday, not till 10pm.)

Get free one-on-one pension guidance if you’re confused

If you’re struggling to understand pensions, there’s free help available. As a first port of call, you can and should get help from the Pensions Advisory Service. Martin said: “The Pensions Advisory Service is an arm’s length Government agency that will give you one-on-one advice.”

Remember, there is a clear difference between guidance and advice. Guidance is offered by an impartial service which will help you to identify your options and narrow down your choices but will not tell you what to do or which product to buy; the decision is yours. 

Advice will recommend a specific product or course of action for you to take given your circumstances and financial goals. This will be personal to you, based on information you provide. Read our guide on picking and paying for an independent financial adviser

Consider how long you’ll live before withdrawing any pension cash

Of course, despite ‘pension freedom’ rules meaning savers can now access their cash from age 55, Martin warned that you need to try to estimate how much longer you’re likely to live for as this will help you to know how much cash you need. 

Martin explained: “When ‘pension freedom’ first happened, the big newspaper worry was ‘people are going to buy Ferraris and have no money for the rest of their life’. My concern was actually the opposite. I think we’re quite risk-averse as a nation, so people would be living very low standards of living so they’re eking out enough cash for the rest of their life, when they could actually have a better life.”

To try to find a balance, you’ll need to consider your health, genetics, whether you smoke and your age. Martin points out that a man aged 65 now will live on average for 20 more years, and a woman for 22 more years – so plan your finances that way and don’t underestimate how much longer you’re likely to live.

Work out how much you should save each year with Martin’s trick

Martin also revealed a trick to work out how much you should save into your pension pot each year to live comfortably in retirement. As a rule of thumb, Martin explained: “To get roughly two-thirds of your final salary each year in retirement, you’d need to take the age you start contributing to your pension, halve it and put that percentage of your salary in for the rest of your life.”

He used the example of several celebrities, and what they’d need to save each year to get roughly two-thirds of their final salary each year in retirement if they started saving now: 

  • Athlete Dina Asher-Smith, 25, would need to save 12.5% each year for the rest of her life.
  • Singer and TV presenter Rochelle Humes, 31, would need to save 15.5%. 
  • And TV presenter Ben Shephard, 46, would need to save 23%.

But Martin added: “I know what you’re thinking – you’re doing the equation for yourself and thinking ‘there’s absolutely no way I can afford that’ and you’re right. Very few people do.

“The real message I want you to get out of that is that the earlier you start contributing to your pension, the better, as the less of your salary you have to put in. If you know a 20 or 21-year-old, tell them, ‘get money in your pension now, even if it’s £10 or £20 a month’, because it has got time to compound and that’ll make you a much better retirement.”

You may also like

Leave a Comment