It's costing them tens of thousands of pounds, a pension provider has warned.
Before they hit 65, they pulled in an average of £47,000 in readies – and experts warn this could leave them struggling in old age.
Following an examination of more than 232,000 customer transactions between 2019 and 2023, it was discovered that more than half (52 per cent) of those who chose to access their pension early did so five years before their intended retirement age of sixty-five, resulting in a loss of approximately £14,000 in growth potential.
Another 21% withdrew their cash nine to 10 years ahead of schedule, missing out on nearly £25,000.
The way in which a lump sum is drawn upon can also make it much more labourious to get the pot back up to its previous level.
In 2015, it has been possible to take a lump sum of up to the full value of any pot when you have reached the normal minimum pension age, with 25% tax-free and income tax payable on the other 75%.
Deciding to take your entire pension as one large sum, or starting to take regular lump sums can leave you facing a tax bill, and also triggers the Money Purchase Annual Allowance (MPAA), unless the pot totals less than £10,000 and is taken in full at the same time.
Once this occurs, your annual pension contribution limit will be immediately reduced to £10,000 free of tax charges from then on. It also inherits the prohibition of carrying over previous year allowances, severely reducing your capability to replenish withdrawn amounts.
Andrew Tully, of Nucleus Financial, stated: “The effects of the cost of living crisis will unfortunately be felt for many years to come, so it’s no surprise to see an increasingly larger number of people making withdrawals from their pension savings. However, getting your pension to last throughout your retirement is going to be a significant challenge.”
There’s also a risk that many people may not be aware of. As they continue or restart their working lives after making a taxable withdrawal from their pension, they and their employer may wish to continue paying into a workplace pension. However, if they've triggered the Money Purchase Annual Allowance, this could lead to an unexpected tax charge which makes it much more difficult to rebuild their retirement savings.
According to the FCA, more than half a million people over 55 accessed their pension savings for the first time between 2019 and 2023.
Around 105,000 investors withdrew a partial, taxable lump sum, while approximately 400,000 withdrew pots worth more than £10,000 in full. Both of these actions would trigger the Money Purchase Annual Allowance (MPAA).
Taking a tax-free lump sum normally sidesteps the MPAA issue. Although you would miss out on the potential growth it would have earned had it stayed invested, your pension should hopefully continue to grow until you need to access it.
In this case, you'll also remain eligible for tax relief on future pension contributions up to £60,000 or your annual salary, whichever is less, and unused allowances can be carried over from the past three years.
Graeme Bold, of Scottish Widows, stated: "Although early pension withdrawals are often unavoidable, taking too much from a pension pot too quickly can carry risks which both companies that provide pensions and retirees should take steps to protect themselves against whenever possible."
“If retirement funds aren’t carefully planned against expected living costs, including the cost of care, some people approaching retirement may find they have to alter their way of life or face the very real prospect of running out of money altogether.”
Henrietta Grimston, from wealth management firm Evelyn Partners, said: "There can be various reasons to access a pension early. Some individuals may need it for personal reasons, such as supporting their living expenses or paying off debts. For others, it might be to help out with the family, for instance, assisting with the cost of buying a home for their children or setting up a trust fund for their grandchildren's education."
“What we do know is that individuals generally underestimate life expectancy, and if they don't make proper provision, they may well underestimate their expenses in old age resulting in a genuine risk of running out of money prematurely.”
To deal with "overdue bills" from her late husband Derek's illness, she only accepted a tax-free lump sum so her ability to rebuild her pension pot wasn't restricted.
Mr Tully said: “The key is to consult financial advice or seek guidance from Pension Wise before you withdraw money from your pension, in order to determine the most suitable option for your particular situation.”
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