Latest figures from HM Revenue & Customs report that a record £1.86 billion was taken out of pensions between April and June this year by 200,000 individuals aged over 55, an average of nearly £9,300. Significant amounts of this are being held as cash at a time when savings rates are near historic lows.
“There are good reasons to take money out of a pension early and some not so good reasons,” said Stephen Lowe, group communications director at Just. “Emptying a pension just to park it in cash for an extended period, especially after paying tax on the withdrawal, is likely to have a cost in terms of missed returns over the longer term.
“Where people have a specific objective to use the money then it may make sense to withdraw pension money. Certainly, the FCA doesn’t believe most people are squandering the money but it also is not convinced people are acting for the right reasons.”
He said that the FCA’s recent Retirement Outcomes Review interim report suggested that among non-advised pension savers, 32% of those who withdrew more than £10,000 said they were putting the majority of the money into a cash account1.
“It is concerned that where people are not receiving professional advice, the decision to withdraw money is not being driven by a genuine need for the money.”
The FCA report said the regulator is concerned people are making uninformed decisions and failing to take advantage of help and guidance on offer, potentially “giving rise to direct consumer harm if consumers pay too much tax, miss out on investment growth or miss out on employer contributions”.
Stephen Lowe said the report showed early access could be shaping up to be a particular problem, with 40% of those taking pots aged 55-59 and 31% aged 60-64.
“Most people struggle to save enough into a pension to provide the level of income they aspire to have in retirement,” he said. “Taking money out early may be tempting but is almost certain to dent the income available later, particularly if it means paying tax up front and then saving it as cash rather than longer-term growth assets.”
He suggested those considering cashing in pensions should consider:
• Do I need the money for a practical purpose such as to provide regular income or to pay off debt, or is the decision mainly to ‘free’ the money from a pension?
• How much tax will I pay on the pension money withdrawn?
• How much lower will my income be in retirement by taking money now rather than leaving it to grow for longer?
• Will it impact on my future pension saving, for example, because I lose employer contributions or become subject to a reduced pension saving allowance?
• Should I seek a second opinion by seeking guidance or advice?
“The free guidance provided by the government’s Pension Wise service is a good sense check for anyone trying to decide how best to use their pension money,” said Stephen Lowe.
“It gives people who perhaps don’t feel so confident about pensions a much better idea of the options that are available to them and gives context around important issues such as life expectancy.
“There seems to be a feeling that taking modestly sized pension pots early doesn’t seem to matter but nothing could be further from the truth. The State Pension, for those lucky enough to get the full amount, will only cover the basics and even a small private pension left to grow and used wisely can make for a more comfortable life in retirement.”
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