By Alanah Khosla for Mailonline
16:46 18 June 2024, updated 18:49 16 June 2024
Martin Lewis has warned against cashing out of a pension, claiming it is “one of the biggest mistakes you can make when you get it wrong”.
The British money-saving expert, 52, from Manchester, discussed the topic on today’s episode of This Morning.
A pension is a tax-efficient retirement savings pot into which employees and their employer can add money.
“Putting money out of your pension is one of the biggest mistakes you can make if you get it wrong; it can cost you tens and thousands of pounds that you can’t get back,” Martin warned.
During the show, Martin used the analogy of a Swiss roll jam 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 as a bank account,” Martin said.
Although unlikely, if someone wanted to withdraw the entire amount of 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 the analogy of a Swiss roll jam, Martin explained why this might not be the wisest route.
“The jam in my Swiss roll, that’s the tax-free amount, and the mushroom is the taxed amount in savings,” Martin explained.
He continued, “If you remove it [the jam] from the bank account what happens is like taking a slice of swiss roll you can’t just take the 25 percent [the jam]but you also get some mushroom.
Because you take a slice of Swiss roll with jam and sponge, “25 percent of it is tax-free and the rest is taxable,” Martin said.
He continued: “So if you take £10,000, £25,000 is tax free and £7,500 is taxable.”
Martin explained that there are three alternatives. First, you can take 25 percent tax-free and buy an annuity — giving you a guaranteed income for the rest of your life.
Or you can take 25 percent tax-free and then make income withdrawals from the remaining balance, “withdrawing is just another form of investment,” Martin said.
He added: “That way you can take 25 per cent tax-free and leave the rest in a drawdown or an annuity for later.
Martin went on to explain why this is a better option. “Let’s say you still work when you get married [cash out] and you are a twenty percent taxpayer.
“If you withdrew £10,000, £7,500 will be taxed at 20 per cent. Alternatively, you can take 25 percent tax-free and keep the rest invested until you stop working and are no longer a tax payer.
“Then you’re in the lower bracket and you take an amount [but] even if it is taxable, you are not a payer, [so] it’s tax free for you.”
It comes after Martin Lewis revealed how tourists can get the cheapest Easyjet flights for 2025 – but they’ll have to be on their toes.
The founder of Money Saving Expert told his 2.9 million followers on Twitter that the airline has started selling tickets from March to June 2025 – and that if you want the best chance of securing a deal, it’s best to act fast.
He wrote: “Just heard that Easyjet will start flights from March to June 2025 tomorrow [Tuesday] from 6 o’clock in the morning.
“Bagging them right when they launch (browser refresh type thing) is often (no guarantee) the way to get them for the lowest possible price.
“The number of flights can increase by £100 even after a few hours of the morning start. So if you’re going to book, try early.”
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 up to 15 June 2025.
The airline is advertising 108 destinations from London Gatwick with deals that include flights to Ibiza from £20.99, Amsterdam from £23.99 and Lanzarote from £35.99.
Generally, as the flight date approaches and more seats are sold, prices rise.
Cheapair.com revealed that fares change an average of 49 times, changing by an average of £34 each time.
The California-based company is urging waiting passengers to book flights that take off midweek.
The site said: “Mid-week flights (Tuesday and Wednesday) almost always offer the best value. Mid-week travel should always be a consideration for the budget buyer.”
He added: “Flying on Wednesday will save you almost $100 (£80) compared to Sunday – the most expensive day to fly.”
Does clearing your browser history make a difference? Cheapair.com is unequivocal, stating that the theory that clearing your browsing history will magically show you the lowest airfares is a myth.
The page said: ‘Airlines don’t track your searches so they can raise your prices the next time you fly.’