Martin Lewis, the financial guru, has delved into a complex tax conundrum on how retirees can sidestep paying tax on their pension income.
During Monday’s instalment of his podcast, Martin Lewis fielded a plethora of queries from fans about various tax matters, including exemptions and allowances.
He discussed the personal savings allowance, income tax threshold, and the starting savings rate, which, when utilised together, could enable some UK residents to pocket up to £18,570 tax-free. This sum would be a mix of earned income, interest, and savings income.
Angus from Derby, a listener who had recently retired before he was eligible for the state pension, phoned in with a technical question regarding the starting rate for savings tax.
He was pondering the most tax-efficient way to fund his lifestyle until his state pension commenced.
After Martin elucidated the complexities of the starting rate, Angus revealed a tax loophole he had discovered but that Martin hadn’t yet mentioned.
Angus explained, referencing the personal savings allowance and tax-free savings interest allowance: “When you start drawing down from your pension you can take out the £12,570 times four over three which is below the £17,570. So over a year, assuming that’s your only income, you’ll get more than just the straight £1,000, which I don’t think is very obvious.”
The complex question seemed to perplex Martin and his team of experts on The Martin Lewis Podcast, with tax expert Rebecca Benneyworth responding cautiously: “So you’re drawing more than £12,570… but you’ve still got scope for savings income. You’re right.”
Seeking clarity, Martin queried: “Are you saying you’re taking money out of your pension altogether, so three-quarters of it is taxable and a quarter of it is tax-free?”
When Angus confirmed this, the Money Saving Expert highlighted: “That only works in the situation when you’re using your pension like a bank account. Most people don’t do it that way.”
Offering an alternative method by which savers could receive a comparable allowance, Martin added: “Remember, you could equally do it, if you’re in a drawdown, take the entire 25% tax-free,” referring to the allowance offered on lump sums taken from approved pension pots not including state pension.