Are savers withdrawing cash from their pension pots too early?
More people are now taking pension cash early, but there’s a risk that you could run out of money later in life.
A subtle transformation is occurring within Britain’s retirement framework, as millions opt to withdraw their pension funds well ahead of their official retirement age.
This widespread pattern of early access has sparked worries that many savers may encounter financial difficulties in their later years.
Statistics from the Department for Work and Pensions (DWP) reveal that more than two million individuals have accessed their pension pots before reaching their state pension age.
Of these, slightly over 70% were younger than 65 – see the chart below.
| DWP total pension withdrawals April 2015-2024 (Source: DWP) | |||
| Total individuals | Total payments | Average payment | |
| Up to age 59 | 1,291,000 | £35.59 billion | £27,600 |
| Age 60-64 | 827,000 | £28.56 billion | £34,500 |
| Age 65+ | 885,000 | £38.13 billion | £43,100 |
| All ages | 3,003,000 | £102.29 billion | £34,100 |
As you can see, nearly 43% of all flexible pension payments were made to individuals under the age of 60, who took out £35.59 billion – an average of £27,600 per individual.
A further 28% of payments were received by those aged 60-64. Almost £29 billion (28%) was allocated to this cohort – an average of £34,500 per individual.
Furthermore, these figures don’t account for tax-free lump sum withdrawals, which could potentially amount to billions of pounds on top.
So whilst the Financial Conduct Authority has described this trend as “the new norm”, the billions being taken out suggest that it’s a little more than that.
And the scheduled increase in the minimum age for accessing your pension – referred to as the normal minimum pension age – from 55 to 57 in April 2028 indicates that the government recognises the risk in allowing individuals to access their pension funds prematurely.
There may be valid reasons for individuals raiding their pension pots early. For instance, the current state pension age in the UK is 66 for both men and women. However, this age is set to rise to 67 between 2026 and 2028, and subsequently to 68 between 2044 and 2046.
The DWP’s figures above suggest that many could be retiring – or beginning to phase their retirement – before they reach their actual state pension age.
Then, there’s the upcoming changes to the rules around inheritance tax (IHT) – which will see defined contribution pension pots included in IHT calculations from April 2027. This measure has seen a big jump in people spending their pensions, rather than looking to pass them on to loved ones after death.
So whilst there may be valid reasons for accessing your pension pot early, it should be remembered that pensions are there primarily to provide you with retirement income. By using monies from your pension pot early to subsidise your lifestyle pre-retirement means you could face a shortfall in retirement itself, particularly given that people are living longer.
Because of this, anyone thinking of taking pension cash early should make sure they fully understand the options available to them, as well as the potential longer-term financial consequences.
It’s certainly important not to make mistakes with your pension savings towards the end of your working life, as several research studies show that most people are not saving enough for a comfortable retirement as it is.
Our previous article points out six things you need to consider in the run up to your retirement before you make hasty decisions such as withdraw pension cash.
Seeking professional advice from a financial adviser can help you think objectively about your future, whilst checking out the free, independent and impartial guidance offered by Pension Wise also makes sense. In this way, you should gain a much clearer view of how any early pension withdrawal could impact your later life.
So if you are considering making a cash withdrawal from your pension pot and would like to discuss your options first, please do not hesitate to contact us.
Please note
This article isn’t personal advice. If you’re not sure whether an investment is right for you, please seek advice.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
You should seek advice from your Kellands financial adviser to understand your options at retirement.