Desperate Brits race to cash in pensions to ease cost of living – but might regret it | Personal Finance | Finance

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Britons are racing to cash in their pensions early to help with the cost of living and have fun after a tough few years.

As the UK economy starts to recover many pension savers cannot wait to dip into their pots and spend a little extra money. Latest analysis shows more than three-quarters of retirees have now withdrawn money from their pensions before reaching retirement age.

They are taking £47,000 on average, giving them and the wider UK economy a huge spending boost, according to a study by Scottish Widows.

While many are raising funds to meet everyday household bills, others are spreading their savings around to help their children and grandchildren get on.

Some are even spending the money on treats such as a luxury holiday of a lifetime, as the country’s mood starts to lift.

Last week, the Office for National Statistics said the UK economy is going “gangbusters”, as it outstrips Bank of England forecasts to grow at its fastest rate in two years.

GDP rose 0.6 percent in the first three months of 2024, the strongest increase for any G7 country, with the US up 0.4 percent and the eurozone trailing on 0.3 percent. France and Germany grew by just 0.2 percent.

The FTSE 100 index hit yet another all-time high yesterday and has now climbed almost eight percent in the last month.

By contrast, the once booming US stock market rose just half that amount over the same period amid inflation fears.

The UK’s stock market surge is boosting the value of the nation’s pension pots and making the over-55s more confident about flexible pension withdrawals.

Under pension freedom reforms, introduced in 2015, the over-55s can use their nest eggs as cash machines, withdrawing lump sums or regular income whenever they wish.

Britons have withdrawn £72.2billion since being handed the freedom to manage their own money, rather than being forced to buy a poor value, inflexible annuity at retirement.

Everyone can withdraw 25 percent of their pot entirely free of tax, although any further withdrawals will be added to that year’s income and may be subject to tax.

The Scottish Widows report shows that of those taking money out early, more than half withdrew funds five years before their selected retirement age.

One in five even opted to start taking out funds nine to 10 years before their retirement age, triggering fears that some are raiding their pensions too soon.

Former pensions minister Steve Webb, now at pensions consultancy LCP, said the big advantage of modern pensions is that you can choose when to take them, provided you are over the age of 55.

“This allows people to use their pensions at a time that is right for them, including keeping their head above water during a cost-of-living crisis.”

Others use the cash to pay off debts or help children or grandchildren with a house deposit. Mr Webb added: “But taking too much out too early could leave them struggling in later life.” 

Jonathan Watts-Lay, director at retirement specialists WEALTH at work, said early pension withdrawals should only be a last resort as the money may need to last more than 30 years.

“Taking too much could have a dramatic impact on your quality of living in later life.” 

When people withdraw money from their pots, they also lose all future growth on that money over time.

Scottish Widows calculations show somebody who withdrew £47,000 at age 55 could potentially sacrifice future growth of £13,900 by the time they reach 60.

That could rise to around £24,600 if the money remained invested for 10 years to age 65 and more than £38,000 if invested to 70, depending on how markets perform.

Graeme Bold, workplace pensions director at Scottish Widows, said while some early withdrawals are an unavoidable necessity, draining a pension pot too soon can carry risks.

As people live longer, their money has to last longer, too.

Mr Bold said: “More needs to be done to encourage people to keep their pensions invested for as long as possible.”

Separate figures from the Financial Conduct Authority recently showed more than 420,000 pension pots were emptied when accessed for the first time during the 2022/23 tax year – up from 395,000 the previous year.

The average withdrawal was around £12,500, but tens of thousands took pots worth more than £30,000.

Those aged between 55 and 64 were most likely to cash in their entire pots, accessing almost 300,000 of them despite not yet reaching the state pension age of 66.

Former pensions minister turned campaigner Baroness Ros Altmann said some people are making pension withdrawals to replace lost earnings when caring for loved ones, or working part-time during ill health.

“If too many people just take the money out as soon as they can, even if they don’t really need to, then there will be more pensioners in poverty in future, placing a bigger strain on public finances.”

And she warned against moving cash from a pension into a savings account, where it may lose tax perks and grow more slowly.

The Baroness added: “Many who do this will struggle to build back their pensions later so will be poorer in retirement.”


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