People choosing to access their pension pot early could find they are left short in retirement, experts warn
Almost half of people making flexible pension withdrawals are doing so before reaching state pension age, raising fears they could be running down their savings too early, experts warn.
Figures from the Department for Work and Pensions (DWP) reveal that 71 per cent of flexible pension withdrawals since the 2015 Pension Freedoms reform have been made by people under 65.
The data, which excludes tax-free lump sums and annuity purchases, shows that 43 per cent of withdrawals were by people under 60, with another 28 per cent made by those aged 60 to 64.
In total, more than £103bn has been withdrawn. Of that, £36bn came from under-60s and £29bn from people aged 60-64.
Retirement specialist Just Group says the scale of early access raises serious concerns about long-term financial security.
Stephen Lowe, group communications director at Just Group, said the trend is well established and worrying.
He said: “Perhaps if the FCA had called it an ‘epidemic’ it might be viewed in a different light and more steps taken to understand the consequences.
“Pension flexibility is double-edged – it can be done for good or bad reasons.
“Ultimately, pensions are primarily to provide retirement income, and that money won’t be available in old age if people are using it to subsidise their lifestyle long before retirement.”
People may access their pension early for a variety of reasons, either to pass on to their children or grandchildren, for example, or simply to supplement their existing income.
Mr Lowe warned that the DWP stats only show part of the picture, explaining that these numbers only give a glimpse of one aspect of pension withdrawal, but do not show the full extent of early access in terms of the number of individuals taking cash and the amounts they are withdrawing.
He said there is a “massive blind spot” in understanding why people are accessing their pensions and whether they are doing so wisely.
What is flexible pension access?
- Flexible payments – also known as pension drawdown – allow people to withdraw from their pension pots from age 55, rising to 57 in 2028
- 25 per cent of each withdrawal is tax-free, while the remaining 75 per cent is taxed as income
- This is different from the initial tax-free lump sum, up to 25 per cent of the pot, which many people take without triggering further withdrawals – and which is not counted in these figures
Mr Lowe added: “We can’t tell how many accessing cash early are doing it for savvy financial planning reasons compared to how many are taking unsustainable amounts that will likely leave them short in the future.”
Anyone thinking of tapping their pension should take time to explore their options, he urged, adding that professional advice and free, impartial guidance from Pension Wise can help people avoid decisions they may regret later.
Lucie Spencer, financial planning partner at Evelyn Partners, said the figures were “striking.”
She said: “It could suggest that many people have been taking pension cash earlier than is ideal, perhaps, for instance, to see them through the cost of living crisis and the spike in mortgage costs, or to help their children or grandchildren onto the property ladder. Which could then also mean that some will be left short later in retirement.
“But the report is correct in observing that the data on pension access is incomplete, and we can’t draw too many definite conclusions from it.
“For instance, how much of these withdrawals is accounted for by people cashing in small pots accrued since auto-enrolment? How much of the withdrawals are planned and made with a sound financial outlook?”
She added, however, that as the figures do not include the amounts taken as tax-free cash, it does suggest that some savers might be a bit “trigger-happy” once they have access to their pots.
“We would always suggest taking advice before crystallising your pension, not least because there can be tax consequences.”
Sir Steve Webb, former pensions minister and now partner at consultants LCP, said it is too early to draw conclusions based on current behaviour.
He said: “We are still in the early days of Pension Freedoms, and we need to be careful not to assume that the behaviours we see now are a good predictor of how people will behave when they have much larger pension pots.
“Most of the pension pots cashed out in full so far are for very small amounts and simply would not have generated a meaningful income stretched over twenty or thirty years of retirement.
“But over time, with fewer people having traditional final salary pensions and millions more people building up pension pots through automatic enrolment, we will see a shift.
“A medium-sized pension pot, which is someone’s only provision for retirement beyond the state pension, is much less likely to be cashed out, so the focus is likely to shift on making the best use of those pots to support finances through retirement.”
The Government has been contacted for comment.