Money expert Martin Lewis issued the guidance as he shared two pension ‘superpowers’
Martin Lewis(Image: ITV)
Martin Lewis has called on everyone earning above £10,000 to act now or risk losing out on what essentially amounts to a free salary boost. The well-known money-saving guru recently featured on his BBC Radio 5 podcast, where he detailed two pension ‘superpowers’ and described how they can prove enormously beneficial for those in work.
Throughout the podcast, which can be accessed in full here, Mr Lewis emphasised two elements of pensions that render them ‘unbeatable’. These include the fact that payments are taken before income tax is calculated, and that employers are legally required to make contributions, reports Chronicle Live.
He said: “The two pensions superpowers which mean you can double your investment instantly. The most important thing I’m going to tell you about pensions today.
“This is crucially important – pensions have two superpowers in my view and I want to explain them. The first pensions superpower is this: You contribute to your pension through your pre-tax income. And that means you get more savings than it costs you. So imagine you’re putting £100 into your pension from your salary, which is how many do it.
“Normally for someone who pays tax at the basic 20 per cent rate for every £100 you get in your salary you only take home £80 of it. Yet pension contributions are made before the tax is taken out. That means you get to invest the £100, because the £100 comes off your salary but you only lose £80 in your pay packet. So effectively the tax relief is the difference – you get a £100 investment and it only costs you £80.
“If you are a higher 40 per cent rate tax payer you get £100 investment and only lose £60 from your pay packet. If you’re a top 45 per cent taxpayer you get £100 investment and only lose £55 from your pay packet.”
Mr Lewis questioned whether the highest earners should benefit most from tax relief. He said: “That is the crucial superpower.
“Quite simply when you put money in normal savings and normal investments it’s coming from your after tax salary, so you’ve already lost that £20 or that £40 or that £45 to the tax office.” He went on to explain that contributing to a pension provides an immediate ‘boost’, since payments are deducted before tax is applied.
Turning to the second superpower, Mr Lewis emphasised this benefit applies exclusively to workers. He said: “Do not throw away a hidden pay rise.
“If you save in your pension your firm must contribute too. So by law if you’re an employee aged 22 to 66 earning over £10,000 you are automatically enrolled into a pension – in other words you are opted in to contributing without being asked. I’m a big supporter of this because it pushes people into good financial behaviour even if they’re not sure what they want to be doing later in life.
Automatic enrolment benefits
He outlined how automatic enrolment obliges employers to make matching payments, effectively acting as an additional pay boost. For money purchase schemes, he highlighted the minimum contribution requirement of 8 per cent on qualifying earnings, assessed on amounts ranging from £6,240 to £50,270. He said employers must provide at least three percentage points of this, explaining that of the eight per cent deducted from someone’s wages, three per cent originates from the employer while five per cent comes from the worker.
Mr Lewis went on: “And some employers will contribute more and that is a huge boon and you’re being paid more in total, although admittedly your disposable income is lower because of your contribution. You lose a little in the short run, but you gain a lot in the long run.” Breaking down the combined effect of these two pension advantages, he explained: “We’ll start with the basic rate taxpayer.
“You put £100 in your pension but it only costs you £80. But because you’ve put £100 in your pension your employer has to add £60, assuming you’re in the right level of earnings, so that would mean you’re getting £160 a month of investment, but you’re only losing £80 in your pay packet to do it. That is unbeatable – there is nothing else like it out there.”
This advice arrives as chartered financial adviser Martin Rayner from Compton Financial told Sky News that immediate action is required to prevent April salary increases from vanishing. He outlined a simple ‘rule’ for managing pay increases – describing it as the smartest approach. He advised: “My best piece of practical advice is… follow the “never saw it” rule.
Start contributing to a pension the moment you start working. Every time you get a pay rise, immediately divert 10% of that increase into your pension. If you never see the money in your bank account, you won’t miss it – but your 60-year-old self will treat you like a hero.”
Addressing pensions, he continued: “The smallest habit that can have the most explosive impact is… starting a pension when you get your first payslip. Some people wait until their 30s or 40s, but by then, they’ve already missed the most powerful growth years.
“Assume a 7% growth rate, and your money doubles every 10 years. If a 27-year-old starts now, their money has 40 years to grow before they hit state pension age. That means every £100 they tuck away today has the potential to become £1,600 by the time they retire.”
