Pension Benefits Explained — Full Breakdown & Transcript

[00:00] So pensions, one of the biggest battlegrounds of the upcoming election, but they're still such a confusing topic. A few weeks ago, Martin Lewis talked about pensions with us in the studio, but we barely scratched the surface. They'll be back with us now. Morning, Martin.

[00:14] Good morning. So tell us, what are the benefits of a pension? Well, a pension isn't a product. That's the first thing you have to understand. A pension is a tax wrapper. It enables you to put money away to save for retirement from your pre-tax income.

[00:28] So this is crucial. So if you put £100 in your pension, because it's from pre-tax income, if you're a basic 20% rate taxpayer, it only costs you £20 in your pay packet.

[00:40] So the extra £20 added on top, so you get £100, it costs you £80. If you're a higher 40% rate taxpayer, it only costs you £60 in your pay packet. So you get a £100 safer retirement, but the cost to you,

[00:54] you're only losing £60 from your pay packet because it would have been taxed tax and you would have lost that in the tax. That is the big pensions benefit. Now if you do it by your workplace that happens automatically so you don't see it. If you're self-employed when you

[01:07] put money in a pension the 20% automatically gets added on what you put in your pension and then you can claim back the rest through self-assessment and self-employed people do a self-assessment tax to get the extra benefit. Now that doesn't actually go into your pension

[01:20] you can have that money you could choose to put more in your pension you could choose to have it go that way. So the really big thing, a pension, in a nutshell, is a savings account for old age, but you do it from your pre-tax salary so you get more in and lose less. That's what a pension is.

[01:35] When you do that, you can then choose to invest it in lots of different types of things, but a pension is just a wrapper that protects you from that tax. Is everybody always auto-enrolled, though? Okay, not everybody is auto-enrolled. You have to be between the ages 22 and 66 and earn

[01:51] over but auto is crucial So this is what happens when you are in a workplace or an employee if you earn over 10 grand you in that right age you automatically going to be saving towards your pension

[02:04] And the rules state that on an 8% contribution, so 8% of your salary is going in, you pay at least a maximum of 5% and your employer pays a minimum of 3%.

[02:16] So let's take it on the minimum. Some employers are more generous. Let's just go back to our 100 quid. on our 100 quid, you put 100 quid in, so if that's the 5%, your employee would have to add 60 quid on top.

[02:28] So you put 100 quid in, 60 quid on top, but remember, as a basic rate taxpayer, it's only costing you £80 because of the tax relief. So you're losing £80 from your pay packet, you're getting £160 added into your pension,

[02:42] double the money, there's no other savings like that. And if you're a higher rate taxpayer, you're paying £60 and getting £160 put into your pay packet. So absolutely the start place for everyone, if you're an employee, try and max out your pension

[02:58] so that the company is giving you the maximum contributions it will put in. Otherwise, you're giving up a pay rise effectively. It's a bit like saying, should I opt out? Well, only if you want to give away a pay rise. Yes, you'll have less disposable income, but you'll have more money going in.

[03:10] And on this, you asked about everybody. So, if your age between, let's just check it's 16. If your age between 16 and 74, so remember, it only starts at 22, so that's 16 to 22,

[03:25] and it stops at 66, so that's 66 to 74. So, if you're older or younger, or you earn between six and a half grand and 10,000 pounds, you won't automatically be saving in your pension.

[03:37] but you can ask your employer put me in the pension scheme and if you do opt in it has to do those extra contributions it has to add the money for you so I'd strongly recommend anyone

[03:49] who is 16 to 22 yeah or 66 to 74 or in between but earning over six and a half grand and less than 10 grand if you can afford it ask your employer to opt you in and it has to they can they can they have to give you

[04:06] more money they have to give you more money that's the simplest way to trade it if you can afford to do so so you can't get at it until you're 55 correct how does it how does the money then work do you withdraw it like a bank how does it

[04:18] What? Time for the fish roll. This is two that you prepared earlier. Here's two I prepared earlier. I cut them away with my hands up. Right, look. Since they introduced what's called pension freedom, you have been able to have your pension

[04:34] like a bank account. You've put your saving money in the pension pot and you've got the money sitting in there. And then it acts a bit like a bank account. Now the thing most people know about taking money out of your pension, most people can take 25% of it tax free and the rest is taxed.

[04:48] So let's see the jam in my Swiss roll, if I hold that up to the camera. The jam in my Swiss roll, that's your luxury, your tax-free amount. And the sponge is the taxed amount in the savings. Now, if you just withdraw it from like a bank account, from the pension,

[05:02] what happens is you're taking a slice of Swiss roll. You can't just take the 25%. You take out money, 25% of it is tax-free and the rest is taxable. So that's if you just take it out.

[05:14] So you can take £10,000 out, £2,500 tax free, £7,500 is taxable. The alternative... This is actually a Swiss roll they're professing you with no jam in. No jam. And here's the jam.

[05:27] Yeah. Right. The alternative... So that's the tax amount and that's the tax free. That's tax free. Is you can take 25% tax free out. You can take just some jam out. There we go. I don't want to bother him to do that, but hey.

[05:39] I think he's going to have a bell warning. I can have a little bit. You can take a little bit tax free out. as long as you put the rest in a drawdown investment or an annuity. An annuity is a payment each year for the rest of your life a drawdown is just another form of investment That way you could take 25 tax free and you could leave the rest in your drawdown or in your annuity for later So why would you do this is the key question So let say you still

[06:05] working when you take this and you're a 20% taxed person. Well, and you've taken your £10,000 out, £7,500 of it, the sponge, is going to be taxed at 20%. Alternatively you could just take the 25% tax free, you could leave the rest

[06:20] invested until you stop work and you're no longer a taxpayer and you're in a lower bracket and then you take this money out and now even though it's taxable because you're not a taxpayer

[06:32] it's tax free for you. The same is true if you're in a 40% or 20% so look if you do not understand this I'm going to make the most important point I make about pensions it's different to other types of money there is the pension wise or money helpers online which are funded by a levy on financial

[06:50] services fund. They will give you free one-on-one guidance. Taking your money out of the pension is one of the biggest mistakes you can make if you get it wrong. It can cost you tens of thousands of pounds that you can't get back. You can get free one-on-one

[07:03] help with it. So this is just like to whet your appetite, if you like, with the Swiss roll. Please, go and speak to PensionWise. It's one-on-one. Make an appointment. Call them. You can get an appointment an hour long. They will go through it with you and get it right. Brilliant.

[07:16] To get this wrong, it will cost you tens of thousands of pounds. Your pension special is still available on ITVX as well, isn't it? There's lots of stuff in there. That was about punching up your national insurance. You've got one year to die, 13 years of missing years of government. One of my friends missed three or four years while he was in Australia.

[07:30] He said about £2,500. So if he buys £2,500 a year, conservative, that's about a grand a year he'll increase his pension. If he lives 20 years, that £2,500 will have gone and been £20,000 tax-free. That's some people's £60,000, £70,000.

[07:42] It's on ITVX. It's an urgent deadline. It was my summer special last week. It's quite complicated. So I couldn't do it on here because it needs a long time to go and watch it. Please go and watch that. Martin, thank you very much. Thank you. Life is easy to understand us as well.

[07:54] Simple as that.