Almost 4 in 5 have accessed their pension pot before their retirement date
How withdrawing money from your pension early can impact on your retirement plans.
Recent research from Scottish Widows shows that 78% of retirees have dipped into their pension pot before they retire. Of that 78%, more than half (52%) withdrew funds five years before their Selected Retirement Age (SRA), whilst 21% started taking out cash 9-10 years before they retire.
Some of this is understandable, as the cost-of-living crisis saw more people accessing their pension pot, for example, but it is important that those approaching retirement are aware of the implications of withdrawing money from your pension early.
Below, we explore some of the issues you should consider before you access your pension for the first time. These should act as pointers to help you to make a decision that’s right for you.
When can you access your pension?
Usually, you can withdraw money from your pension when you turn 55 (rising to 57 in 2028). For most people, that will be before their planned retirement date.
There are many reasons why you might decide to withdraw monies from your pension pot early. As mentioned above, this might be due to the cost-of-living crisis. However, you may want to pay off the mortgage before you retire, take a special holiday, or even help your children with a house deposit. Alternatively, you may be looking to move towards a phased retirement, and want to use monies from your pension to supplement your income.
Whatever your reason, you need to be aware that taking money from your pension before you retire is likely to affect your retirement income and lifestyle once you finally do give up work. Because of this, it’s important that you consider the long-term ramifications and impact, as when you factor in investment returns, the effect could be greater than you expect.
Accessing your pension early leads to lower investment returns
Typically, money held in your pension is invested. This provides an opportunity for it to grow over the long term. As a result, withdrawing funds from your pension early could mean its value when you retire is likely to be lower than you expect.
The Scottish Widows research found that the average amount a customer withdraws by age 65 is £47,000. Their financial modelling shows that if you withdrew £47,000:
- Five years before your retirement date, you could miss out on £13,925 if investment returns
- That figure rises to £24,661 if it were to stay invested for 10 years to age 65 – a rise of more than 50%; and to more than £38,000 if invested to age 70
The figures are based on investment returns of around 5%, which are not guaranteed. However, the data highlights the potential impact of withdrawing money from your pension pot early.
So, when considering the pros and cons of taking money from your pension, you need to consider how lower investment returns could affect your retirement income when you do finally retire.
The need for a financial plan
Withdrawing money from your pension ahead of your retirement means you are likely to miss out on investment returns. However, that doesn’t necessarily mean it’s the wrong decision for you.
For instance, paying off your mortgage early could improve your financial situation both in the short and long term.
You may also be in the fortunate position of being able to withdraw monies now without risking your financial security later in life.
What is crucial is that you understand the potential implications of accessing your pension early, and only then to decide whether it’s the right decision for you. It’s not always easy to assess and you need to take into account several other factors, some of which are outside of your control.
These include:
- Your life expectancy
- Your future income needs
- Potential need to pay for care costs
- The impact of inflation on your expenditure and outgoings
- Your ability to overcome financial shocks.
A financial plan and using tools, such as cashflow modelling, could help you understand how your decisions now could affect your future.
In simple terms, cashflow planning software:
- Takes in all the details of your financial circumstances, from savings and investments to debt and other key expenses
- Applies various scenarios outside of your control, such as investment returns and inflation, both of which could have an effect on your wealth in retirement
- Creates projections based on this data, showing how much you have to live on in retirement, and the age at which you can comfortably retire
- Gives you immense peace of mind as you head towards your retirement years.
Cashflow modelling could give you the freedom of choice over whether to withdraw from your pension early as well as when to retire. It takes into account all your other assets as well – helping you to ascertain whether your savings or other investments could be used to help you reach your goals, for example, instead of accessing your pension.
Contact us
If you’re thinking about withdrawing cash from your pension before you retire, we can help you evaluate the long-term implications. We would work with you to ensure you have the information you need to decide which option is right for you. So why not contact us today?
Please note:
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate cashflow planning.