Martin Lewis warns against crucial pension mistake as he shares top tips for savers

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Has issued a "tax warning" to pension savers, giving guidance that could help retain tens of thousands of pounds.

It's recommended to set an age for pension withdrawals, typically not before 55. However, the timing and method of taking the funds can be crucial, and, warns Mr Lewis, may prove costly if not done properly.

Up to 25 per cent of personal pension funds can usually be withdrawn tax-free, with the rest taxed according to your income tax bracket. However, significant tax savings can be achieved if you expect to move down a tax band in the future.

You can take 25 per cent of your tax-free lump sum and put the rest into an income drawdown, which is an investment product that allows you to withdraw money as and when you need it. Alternatively, you could choose an annuity, which would provide a set annual income for the rest of your life.

With either choice, it would result in the rest of your pension fund (which isn't tax-free) being taxed at the point you access the funds, which could be after you've moved down a tax bracket.

The personal finance expert stated: "Why is this significant? Picture yourself, for instance, as a higher-rate taxpayer earning over 40 per cent of your income, and in the future, once you retire, your income drops to the point where you'll be a 20 per cent rate taxpayer.

So you take £10,000 now, £7,500 of it is taxed at 40 per cent - but if you wait, it'd be taxed at 20 per cent, so less tax would be paid. This could be £1,000s or £10,000s less that you're unnecessarily paying. So please get some advice on that.

The money expert recommends that anyone thinking of making the move receives free one-to-one guidance from Money Helper (if under 50) or Pension Wise (if over 50), both of which are government-backed services.

Here are more top pension tips backed by the money-saving expert in his latest weekly email:

1. Pensions are saved from income before tax is taken out

Money you put into a personal pension will effectively keep its full value, advises Mr Lewis, meaning it won't be taxed in the same way as other types of savings and investments.

where the government automatically tops up your tax payments into your pension scheme.

For someone on the basic income tax rate of 20 per cent, a £80 deposit will be increased to £100. Those on higher tax rates can also claim additional relief to reclaim their rightful amount of tax back.

2. You might have had money left over in forgotten pensions

If you've lost contact with a pension provider, they may not be aware of how to pay you once you retire. This could result in tens of thousands of pounds you've worked hard to save being lost.

There are a number of measures that can be taken to prevent a pension pot from being lost, with the government introducing a tool in 2016 to aid in locating old pensions.

Mr Lewis said: "It's estimated that nearly three million pensions are thought to be "lost", often these are worth around £10,000 - that's a substantial sum of money. So, do try contacting your former employer if you know who they are and get out your paperwork if you still have it.

“If not, there are a number of pension tracing services available, one simple option is the Pension Tracing Service tool on gov.uk, which can list over 200,000 pension schemes.”

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It can be tricky to figure out how much to invest in a pension. Mr Lewis suggests the following: “Take the age at which you start a pension and halve it. Then aim to put this percentage of your pre-tax salary into your pension each year until you retire.”

He concedes that this might be tricky for some, but advises that “the key takeaway is to begin as soon as you can, and it's worth noting you have more time for the benefits to build up.”

4. How to get a 'hidden pay rise'

They also get to join the pension scheme and pay in on their behalf. Since 2019, the minimum contribution rate has been eight percent, with employers required to pay in at least three percent.

This means it often falls to the employee to pay the extra 5 per cent. This can seem like a substantial portion of your income, but Mr Lewis advises against opting out. If you're not enrolled in your workplace's pension scheme, you'll also miss out on their contributions to your pension pot.

5. Don't forget to update your will after a divorce, or you might inadvertently leave your pension to your ex.

Your pension savings cannot be included in your will. You will need to complete an 'expression of wish' form to inform your pension provider who you would like to inherit your savings if you pass away.

Mr Lewis recommends that you should always complete the form, but don't overlook it once you have. After a divorce or split, it's sensible to update your expression of wish to ensure you're not leaving your pension to an ex-partner.

When you invest, you'll be using your money, and there's a chance you might not get it all back. Past successes don't mean you will do well in the future.

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