He issued a warning about a penalty you could face
Martin Lewis has outlined some crucial principles regarding pensions and your other savings. The financial expert explained the rules and offered several tips on his BBC podcast.
He spent a large chunk of the programme discussing Lifetime ISAs. You can contribute up to £4,000 annually into these accounts, with all contributions receiving a 25 per cent bonus, which means you could receive up to £1,000 yearly in additional funds. A query was sent in from a listener aged 45, who wanted to know whether they could transfer some money from a Lifetime ISA into a pension. They were particularly interested in how this related to Universal Credit, since any ISA holdings are classified as savings that may diminish your entitlement, while your untouched pension funds aren’t.
If you are claiming Universal Credit and hold more than £6,000 in savings, for every £250 beyond this limit £4.35 is subtracted from your monthly payment. You lose eligibility for the benefit entirely if you hold more than £16,000 in savings.
The general rule for pensions
Replying to the question, 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 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 went on to discuss how funds in a Lifetime ISA would compare against a pension, depending on your tax situation. For a self-employed person who pays basic rate tax, Mr Lewis suggested it would be an “interesting debate” regarding which option would serve them best. People on the basic rate receive 20 percent tax relief at source on their pension contributions.
However, Mr Lewis highlighted one scenario where pensions would likely prove the superior choice. He explained: “If you are a higher rate taxpayer, you are getting 40 percent relief when you’re putting money into a pension, so that is probably going to win.”
You have to take the decision
Regarding the matter of transferring money from a Lifetime ISA into pensions, Mr Lewis warned listeners that a penalty may apply. The ISA funds must be used for purchasing your first property or can be withdrawn when you reach 60.
Should you withdraw the savings for any other reason, a 25 per cent penalty applies, which removes the bonus along with 6.25 per cent of your personal savings. Mr Lewis advised the listener: “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 finance expert acknowledged that regrettably “there is no easy way” to avoid the penalty given the person’s circumstances.
