Pension withdrawals may be a suitable way for individuals to access additional cash, particularly helpful in times of financial difficulty. Due to pension freedoms rules introduced in 2015, flexibility when it comes to retirement savings has drastically increased, meaning Britons have significant autonomy over their money. In fact, recent statistics from HMRC have shown an increase in withdrawals in July, August and September of this year, a change the government has said may be attributed to COVID-19.
But there is concern many Britons may not understand the true implications of withdrawing from their retirement savings.
While a pension can often be considered ripe for the picking, cash withdrawals may potentially damage a retirement plan.
This is due to a reduced amount for later life, when a salary will not be available unless Britons choose to reenter the workforce.
Jonathan Watts-Lay, Director at WEALTH at Work, a provider of financial education in the workplace, commented on the findings.
While the first 25 percent of a pension is usually tax free, the remaining 75 percent will be taxed as earned income.
A withdrawal, therefore, could mean savers are confronted with a significant tax bill, especially for those who would jump into a higher income tax bracket as a result.
Mr Watts-Lay added: “However, perhaps most importantly, your pension is there is pay for your retirement, and it is crucial that you understand the implications of taking money out of your pension early.
“Whilst you may really need the cash at the moment, you will also need money in your retirement.
“It is important to consider all your options if you are struggling to make ends meet, such as the government-backed recently extended mortgage holiday and debt repayment deferrals, or using alternative savings to replace any lost income, and weigh up the best option for you.”
However, those withdrawing from their pension may also need to look out for unscrupulous scammers, attempting to rob people of their hard-earned cash.
Mr Watts-Lay urged people to think carefully if they are rushing to take money from their pension.
This is because pension scams are rife, and can leave people with a significantly diminished retirement income, or having lost their entire later life savings.
The Pensions Regulator has said fraudsters often use phrases such as cashback, one-off investment, or pensions liberation, and can even promise Britons they can release cash from their pension before the age of 55.
Britons, however, should always be aware of these warning signs and think very carefully before taking any action on their pension.
Ultimately, Mr Watts-Lay concluded, taking financial advice on these matters is key.
As such, Britons may wish to search out their own regulated financial adviser, or ask their employer what support is available through the workplace.