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Pension pots can be accessed from the age of 55 under current rules, while state pensions cannot be received until a person reaches 66 at the earliest. Of course, many people are unlikely to actually retire at 55, meaning dipping into a pension early could be detrimental if a person ends up needing additional income down the line.
This may prove to be an issue for many people as in 2017, the FCA revealed 72 percent of consumers under 65 had accessed their pensions, with most of them taking lump sum payments.
Additionally, the recent retirement income market data bulletin from the regulator showed a record number of pension pots were accessed for the first time, with 56 percent being fully withdrawn.
This isn’t being done by those near traditional retirement ages either, with the data revealing 55 percent of those accessing a DC pension did so in their 55th year.
On this, Just Group produced analysis on pension withdrawals which highlighted how accessing pots early may not be the best option.
They broke down the impact of making withdrawals, even for a person just looking to take their tax-free cash.
The following calculations highlight what could happen to a 55 year old person thinking of taking their full tax-free cash amount from a £100k pot, assuming returns of five percent after charges and a guaranteed income for life (annuity) rate of four percent:
- Leave the £100k pot to grow = £180,000 fund at age 67 (could buy around £7,200 a year guaranteed income for life)
- Take £25k (equivalent to 25 percent tax free lump sum) at age 55 and leave rest to grow = £135,000 fund at age 67 (£5,400 a year guaranteed income for life),
- By taking the 25 percent of the pot at age 55, the saver is giving up the chance to have 33 percent more income at age 67. Effectively, the cost of taking £25,000 is a pension that is worth £40,000 less 12 years later.
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Professional/expert analysis of this nature is being sorely missed by a large number of retirees, which evidently could cost them dearly.
Throughout 2019/20, 673,831 defined contribution pensions were accessed, with 340,133 of these being accessed without regulated advice or guidance.
Stephen Lowe, a director at Just Group, commented on this: “Dipping into pension money is becoming more popular but most people are shunning the professional support that is available to help them make good choices, even when that support is free.”
Stephen went on to explain how people should think of their pensions to ensure longevity: “People should think of their pensions as fortresses rather than prisons for retirement savings.
“Money within a pension is protected from taxes and scams.
“Pensioners need income to pay the bills and the State Pension is not enough to meet most people’s lifestyle aspirations.
“Every pension saver should work out how much private income they are going to need, on top of the State Pension, to cover their essentials and make sure they preserve enough of their pension savings to provide that, before they start thinking of accessing cash earlier.
“Anyone thinking of taking pension cash early should ensure they take the government-backed free, impartial and independent guidance offered by Pension Wise and ideally regulated advice.
“These will highlight the options available and the pros and cons of each course of action so people can make informed decisions.
“More than half (57 percent) of those who undergo a guidance session change their eventual retirement choices, highlighting the importance of a sense-check before making a decision that they may end up regretting.”
The government appeared to address some of these issues recently as it was confirmed the pension freedom age will rise to 57 in 2028 in light of rising life expectancies.
On top of this, the state pension age is set to rise to 68 by 2048.
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