A third of over-55s have already dipped into their pensions before they’ve stopped working, according to a new study. This means millions of Brits are cashing in their retirement savings, but is it the right thing to do?
The study by Just Group, a financial services firm, found that there are two main reasons why people are withdrawing from their pensions before retirement:
- Early retirement: Some people are using their pensions to fund a smoother transition into early retirement.
- Financial needs: Others need the extra income due to redundancy, lower earnings, or simply to make ends meet.
The study revealed that 8% of those who took money out of their pensions regretted it. This highlights the risks involved and the importance of seeking advice before making any decisions. The Daily Mail gave some tips for people who are considering this option. Here’s a summary :-
Is taking money out of your pension a good idea?
Taking money out of your pension before retirement can be a good idea in some circumstances, for example:
- Paying off debt: It might be a good idea to use your pension to pay off high-interest debt like a mortgage.
- Funding a dream: You might want to use it to fund a special project, such as a home renovation or a dream holiday.
- Easing into retirement: You might want to take a smaller pension income and work part-time, allowing you to gradually transition into retirement.
The potential downsides of taking money out of your pension
However, it’s important to consider the potential downsides:
- Tax consequences: There are tax implications to consider when taking money out of your pension.
- Retirement shortfall: You could end up with less money in your pension pot for retirement, meaning you may have to work longer or live on a lower income in later life.
- Future pension changes: The rules surrounding pensions are constantly changing. It’s essential to stay informed about any upcoming changes that could affect your retirement plans.
Key things to remember before taking money out of your pension
Important changes to be aware of:
- Minimum pension age: The minimum age at which you can access your pension is increasing from 55 to 57 in April 2028. This means that those in their late 40s and early 50s need to plan ahead if they want to access their pensions before this age.
- Money Purchase Annual Allowance (MPAA): This is a limit on the amount you can pay into your pension each year if you’ve already taken money out. The MPAA is currently £10,000 per year.
Don’t make a decision without professional advice
The Just Group study found that almost half of those who accessed their pensions before retirement did not receive any financial advice. This highlights the importance of speaking to a qualified financial advisor before making any decisions about your pension.
They can help you:
- Assess your financial situation: They can look at your income, expenses, and any other financial commitments to see if taking money out of your pension is the right option for you.
- Explain the tax implications: They can help you understand the tax implications of taking money out of your pension and how to make the most tax-efficient withdrawals.
- Develop a plan: They can help you develop a plan for your retirement that takes into account your current financial situation, your goals, and any potential future changes to the rules.
Where to get free help and advice
- Pension Wise: This is a free, government-backed guidance service that can help you understand your pension options.
- MoneyHelper: This is another free government service that can provide information and advice on a range of financial matters, including pensions.
- Citizens Advice: This charity can provide free, confidential advice on a wide range of issues, including pensions.
- Age UK: This charity provides support and advice to older people, including information about pensions.
Taking money out of your pension can be a tempting option, but it’s important to make sure it’s the right decision for you. Speak to a qualified financial advisor and do your research before making any decisions.