Personal finance expert warns taking money from your pension incorrectly could see you paying unnecessary tax to the government
01:30, 27 Feb 2026Updated 11:57, 27 Feb 2026
Martin Lewis has given pensions withdrawal advice to viewers(Image: ITV)
Martin Lewis has highlighted a ‘massive tax trap’ that could affect anyone holding a pension. The warning was featured today on his Money Saving Expert website, which shared footage of the financial guru discussing the issue on his programme.
He demonstrated the potential pitfall using a £10,000 scenario and cautioned that getting it wrong means forfeiting £150 or £300 directly to the taxman rather than receiving it yourself – with the amount increasing proportionately based on withdrawals.
Presently, individuals can withdraw funds from their pension from age 55 onwards – though financial advisers typically recommend against premature withdrawals as this may diminish retirement income available in later years. Mr Lewis stated: “Taking money out of your pension. Now you can just leave money in your pension you can leave it invested or you can take it out anytime after your age 55 although that’s going to be 57 from April 2028. If you do this it can reduce what you can put in later once you take the income.
“Now 25% of the money that you take out is tax-free the rest is taxed at your marginal rate. It means if you’re a basic rate taxpayer of course there’s always a bit you don’t pay tax on you personal allowance it’s 20% if you’re high rate tax per it’s 40% that’s what you’re going to be taxed on.
“But how you take it out is a taxing question now I’ve often used a Swiss roll as an analogy we decided on an upgrade this year and we’ve gone for a chocolate Swiss roll.
“So if you just take money out of your pension when you need it out of the pension fund each slice of pension you take is kept integral so if you take £10,000 out of your pension front £2,500 of that will be taxfree and the remaining £7,500 of it the sponge isn’t the jam you will pay tax on at your marginal rate that tax year.”
He outlined that individuals employing this approach end up paying taxation on a portion of their accumulated pension: “So you can’t just take it all out tax free you know only a quarter of it is tax free for each slice but there is an alternative way of doing it. If you take 25% out and put the rest in an income draw down or annuity you can choose to just take the jam you can choose to just take 25% tax free and leave the rest in an annuity or an income draw down so that it is taxed at the point you access that amount of money.
“So why is this important? If you just take it out imagine that right now you’re a higher 40% rate taxpayer and at a later date once you retire you’re not going to have as much income you’d be a 20% rate taxpayer so you take your 10 grand out right no your £7,500 of it is taxed at 40% but if you could wait with it it’d be taxed at 0% so less tax would be paid but if you do it this way you can take all the tax free all the jam all the sugary sweet lovely bit out now and you can wait until later on when your income drops down and you’re not as high a rate taxpayer to take the rest out so that you would only be paying tax at 20 not 40%.
“The same would work if you’re dropping from 20 to a non-taxpayer or higher so the advantage of doing it this way is especially strong for those people who may pay tax income tax at a lower rate later on because they have less income and you can see why I’m saying you get this wrong this could be thousands or tens of thousands of pounds difference that you’re unnecessarily paying so please get guidance on that.”
Citizens Advice states individuals may be eligible to access their pension earlier if they’re retiring on grounds of ill health. Nevertheless, it stresses people should seek financial advice before making decisions regarding personal or workplace pensions.
Take cash lump sums
You can withdraw your entire pension pot as cash immediately if you wish to, regardless of its size. You can also withdraw smaller amounts as cash whenever you require them.
A quarter of your entire pension fund can be withdrawn without paying tax. You’ll be liable for tax on the remainder as though it were earnings.
Example: Your fund stands at £60,000. Should you withdraw the complete amount in one go, you’ll receive £15,000 (25% of £60,000) free of tax.
The remaining £45,000 will be classified as income, meaning you’ll pay income tax on this portion.
Should you opt to withdraw smaller amounts at various intervals, a quarter of each withdrawal remains tax-free.
Example: Your fund stands at £60,000. Should you withdraw £1,000 monthly as cash, £250 (25% of £1,000) will be exempt from tax on each occasion. The remaining £750 will be subject to taxation each time.
Any taxable funds you withdraw from your pension will be combined with your other earnings for that year and taxed according to the appropriate income tax rate. This could potentially push you into a higher tax threshold than usual.
Purchase an annuity
Your pension fund can be utilised to purchase an annuity from an insurance provider.
An annuity represents a yearly income that will be distributed to you throughout your lifetime.
It’s possible to withdraw a portion of your pension fund as a tax-exempt lump sum and purchase an annuity with what remains.
Numerous varieties of annuity are on the market – you ought to compare options to identify the most suitable one for your circumstances.
Check guidance on buying an annuity on MoneyHelper. Typically, you cannot reverse your decision after purchasing an annuity.
Income drawdown
Income drawdown enables you to receive income from your pension fund, whilst the balance continues to be invested. You ought to verify with your pension provider whether they provide income drawdown – certain providers don’t offer this facility.
There are no limits on how much you can withdraw using income drawdown.
You can still take 25% of your pension pot as a tax-free lump sum.
For further assistance from Citizens Advice on pensions click here.