He explained some of the tax rules that apply
Martin Lewis has outlined some key rules surrounding pensions and your wider finances. The money-saving advocate shared a number of valuable tips on his BBC podcast. He also issued a warning about a penalty you may have to pay.
A significant portion of the programme focused on Lifetime ISAs. You can contribute up to £4,000 each tax year into these accounts, with all deposits benefiting from a 25 per cent bonus, meaning you could pocket up to £1,000 annually in bonus cash. One query came from a 45-year-old listener, who was keen to find out whether they could transfer funds from a Lifetime ISA into a pension. Their concern centred specifically on Universal Credit, as any ISA savings count towards the savings threshold that can reduce your entitlement, while untouched pension pots do not.
If you are claiming Universal Credit and hold more than £6,000 in savings, for every £250 above this threshold, £4.35 is deducted from your monthly payment. Should your savings exceed £16,000, you will no longer be eligible for the benefit.
Pensions general rule
Addressing the query, Mr Lewis said: “One of the big problems with a Lifetime ISA is it does count as savings which means it can diminish your Universal Credit entitlement, whereas money saved in a pension doesn’t.
“As a general rule, I would always say the first port of call, especially for any employee, is to use your employees’ pension scheme to save for retirement, because you have a matching contribution from them and you’re getting money put in from pre-tax income.”
He continued by discussing how funds held in a Lifetime ISA would fare compared to a pension, depending on your tax circumstances. For a self-employed person who is a basic rate taxpayer, Mr Lewis described it as an “interesting debate” as to which option would be most beneficial. Those on the basic rate receive 20 per cent tax relief at source on pension contributions.
In contract, Mr Lewis did highlight one case where pensions would likely be the superior choice. He said: “If you are a higher-rate taxpayer, you are getting 40 per cent relief when you’re putting money into a pension, so that is probably going to win.”
Regarding the matter of transferring funds from a Lifetime ISA into pensions, Mr Lewis cautioned listeners that a penalty may apply. The ISA funds must be put towards purchasing your first home, or alternatively, accessed upon reaching the age of 60.
You have to take the decision
Should you withdraw the savings for any other reason, a 25 per cent penalty is incurred, which not only eliminates the bonus but also deducts 6.25 per cent from your own savings. Mr Lewis told the caller: “You will have to take the decision, are you better to take the money out and pay that 6.25 percent penalty and then put that money into a pension, and you will get tax relief for putting it into a pension. You will get tax relief in putting it into a pension.”
The money guru went on to warn that unfortunately “there is no easy way” to sidestep the penalty given the person’s circumstances.
