Martin Lewis has issued a warning to people aged 55 and above about costly mistakes when withdrawing money from pension pots for the first time. The consumer champion cautioned that many mistakenly assume they can take out 25 per cent of their pension tax-free without triggering additional tax consequences.
Writing in the MoneySavingExpert newsletter, Lewis explained that while 25 per cent of pension withdrawals are generally tax-free, the remaining 75 per cent is subject to income tax and could push savers into a higher tax band. He also warned that certain withdrawals can unintentionally reduce the amount people are allowed to save into their pensions in future.
Lewis highlighted complications from emergency tax regulations applied by pension providers on first taxable withdrawals. Providers may use a temporary 'Month 1' emergency tax code, taxing the payment as if the same amount will be taken every month, leading to substantial overpayment. Overpaid tax can be reclaimed from HMRC, but Lewis advised making smaller withdrawals or spreading payments across the tax year to reduce risk.
The alert concerns defined contribution pensions. Lewis cautioned that drawing taxable money can activate the Money Purchase Annual Allowance (MPAA), reducing the annual tax-relieved contribution limit from £60,000 to £10,000. However, withdrawing only the tax-free element, buying a standard annuity, or taking up to three small pots of £10,000 or less does not trigger the reduced allowance.
Lewis urged people to obtain free guidance before making decisions. Those aged over 50 can arrange a complimentary appointment with Pension Wise, while younger savers can access MoneyHelper. He noted that larger pension pots may benefit from paid independent financial advice to avoid expensive mistakes.
