Pensions Panic – Nearly 80% Dipping Into Retirement Funds Early

A recent study by Scottish Widows has highlighted a concerning trend among pension savers in the UK. Astonishingly, almost 80% of individuals have been withdrawing from their pension pots prematurely, taking out an average sum of £47,000. This trend has been most prominent from 2019 to the end of 2023, signaling a shift in how retirees are managing their finances amid economic pressures.

Early Withdrawals

The data reveals that a significant portion of savers, about 52%, accessed their pension funds up to five years before their chosen retirement age. Additionally, 21% of people began tapping into their pensions even earlier, withdrawing funds nine to ten years ahead of schedule.

Interestingly, only 20% of individuals waited until their selected retirement age to start using their pension money. This highlights a drastic shift from traditional pension planning, where funds were often untouched until actual retirement.

Why Are Savers Withdrawing Early?

The reasons behind this trend are multi-faceted. Since the pension freedom reforms of 2015, over-55s have been able to withdraw from their pensions either in lump sums or as regular income, without needing to buy an annuity. This has granted more flexibility but also more room for potentially risky financial decisions.

The majority of early withdrawals are being used to manage day-to-day living expenses, driven by rising inflation and living costs. However, Scottish Widows notes that some individuals are also spending this money on holidays and leisure activities, trying to find some joy after recent turbulent years.

The Financial Impact of Early Withdrawals

The consequences of withdrawing money early from pensions can be significant. According to Scottish Widows, leaving money invested could see a potential growth of £25,000 on average. For instance, if £47,000 remained invested from the age of 55 to 65, it could increase by over 50%, reaching an additional £24,661.

More detailed modeling shows that if only the tax-free portion (25%) is withdrawn early, and the rest remains invested, the growth could still be substantial, with savers potentially being £18,496 better off after ten years.

Risks and Advice

Scottish Widows warns of the risks associated with early withdrawals, such as tax implications and reduced financial stability in later years. Graeme Bold, the director of workplace pensions at Scottish Widows, emphasises the need for both savers and providers to take protective measures against these risks. He suggests that more effort is needed to encourage individuals to keep their pensions invested for as long as possible, ensuring support through all stages of their investment lifetime.

While the freedom to manage pension funds has given retirees more control over their finances, the trend of early withdrawals poses potential risks to financial security in later life. Savers are encouraged to consider these implications carefully and seek professional financial advice when contemplating early access to pension funds. As the minimum age for accessing pensions is set to rise from 55 to 57 in 2028, planning for the future and understanding the impact of early withdrawals will become even more crucial.