More than three-quarters of savers withdrew cash from their pension funds before reaching their selected retirement age in recent years, a new report claims.
Research compiled by Scottish Widows showed the average amount withdrawn before retirement was £47,000, with many using the cash to keep on top of bills and higher living costs.
Around a fifth, or 21 per cent, of people took cash out of their pensions nine to ten years before their selected retirement age.
And this is likely to have benefited cost savers, as Scottish Widows said leaving the money invested could have seen pension funds grow by an extra £25,000 on average.
Cash early: More than three quarters of pension savers withdrew cash from their pension funds before reaching their selected retirement age, Scottish Widows said.
The investment firm’s study stated that 78 percent of pension savers withdrew money early from their funds between 2019 and the end of 2023.
The findings suggest that more than half of savers, 52 per cent, who cashed out of their pensions early did so five years before their selected retirement age.
Only 20 percent waited until their chosen retirement age to withdraw their pension.
A selected retirement age refers to the date someone chooses to retire, but not necessarily the earliest date they can access their pension fund. Rules on access to work and private pensions mean they cannot currently be taken advantage of before age 55, but savers will soon have to wait until age 57 to access pension funds.
Why are savers turning to pension funds early?
Widespread pension freedom reforms introduced in 2015 meant that, instead of most people having to use defined contributions from work or private pension funds to buy an annuity, they could keep them invested in retirement and draw on them .
Over-55s can withdraw lump sums or regular income from their pension funds whenever they wish.
Whenever a lump sum of money is withdrawn early from a pension, 25 per cent is usually tax-free. However, the rest is added to any other income and is subject to taxes.
Brits have withdrawn £72.2bn since being given the freedom to manage their own money, according to figures from HM Revenue & Customs.
The minimum age to start accessing most pensions will increase from 55 to 57 years on April 6, 2028.
Many are spending their early withdrawals on everyday costs, amid higher inflation and living costs, Scottish Widows said.
However, he added that others were spending money on holidays and fun after a turbulent few years.
Graeme Bold, head of workplace pensions at Scottish Widows, said: “Our data shows that the vast majority of people withdraw money from their workplace pension before reaching retirement age.
“While early withdrawals are often an unavoidable necessity, depleting a pension fund too early can carry risks that both providers and retirees should take steps to protect against where possible.”
He added: “More needs to be done to encourage people to keep their pensions invested for as long as possible.” It is up to pension providers to support people throughout a lifetime of investing – before, during and after they reach retirement age.’
Scottish Widows analyzed workplace pension scheme customer behavior across more than 230,000 different pension claim transactions between 2019 and 2023.
Last month, data from the Financial Conduct Authority suggested that more people aged 55 and over were drawing on their pensions and more than half were collecting them in full. However, some of this was credited to savers cashing out small funds entirely, rather than their main retirement fund.
Almost 740,000 pension funds were accessed in the 2022-23 financial year, around 5 per cent more than the previous year, as people struggled to pay household bills in a period of rising inflation.
About 56 percent of jackpots were being fully cashed in; most of them were worth £10,000 or less, according to the FCA.
Scottish Widows said people withdraw an average of £47,000 early from their pensions
How much are pension savers missing out?
Scottish Widows’ findings suggest that pension savers withdrew an average of £47,000 from their pension funds before their selected retirement age in recent years.
Scottish Widows’ financial modeling showed that leaving this £47,000 sum invested in a pension until age 65 could increase it by more than half, or almost £25,000.
Scottish Widows said: ‘If the money remained invested from age 55 (when the member would have first been able to receive benefits) for a further five years, they would have £13,925 more on average by the time they reached age 60.
‘That figure rises to £24,661 if it were kept invested for 10 years to age 65, an increase of more than 50 per cent; and more than £38,000 if invested until age 70.’
He added: “A separate document The modeling exercise was carried out under the assumption that members were claiming the maximum tax-free cash available at age 55, which is currently 25 per cent, equivalent to £11,750.’
If the same model were applied to the £32,250 remaining in members’ funds after taking the tax-free cash, savers would be on average £10,441 better off after five years, and £18,496 better off after 10 years if they decided to stay invested . according to Ton Scottish Widows.
Taking money out of a pension early is not a step that should be taken lightly. There may be tax implications and a possible impact on your finances in the future. It is wise to seek professional financial advice if you are considering this option.
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