Pension pots can generally be accessed from the age of 55 under current rules. Pension freedom laws allow people to withdraw from their pensions in many different ways but overindulgence with this can deplete a person’s retirement funds.
Becky O’Connor, the Head of Pensions and Savings at interactive investor, also commented on ABIs research, noting the dangers of tapping into a pension too early: “Right now, it seems there is more risk of people making potentially damaging decisions with pensions than ever.
“The global pandemic has been a double whammy for people in or approaching retirement who have the option of accessing their pension.
“Not only have their returns been all over the place through stock market volatility, causing anxiety and making it hard to know whether to withdraw, to add insult to injury, but some have also faced difficulties maintaining other sources of income, causing them to make untimely pension withdrawals that could cost them dearly later on.
“Clearly, having more education, guidance and advice would all help people who are facing these life-changing dilemmas with their pension pots.
“However, as the ABI research shows, the cost of financial advice can be hugely off-putting for many people. People also prefer to do their own research, with authoritative information sources being among the top choices.
“There is a lot of helpful information out there on specialist and government websites.
“While there are occasions when bespoke, personal advice is the right course of action, at present, it does not always reach those who would benefit because it’s not cost-effective for them.”
“More education and guidance about the options people will face earlier in retirement savings journeys would also help to prevent panicked and costly decisions later on.”
Heeding guidance before taking a pension withdrawal could be crucial for many as a recent analysis from Just Group revealed that accessing pension pots early could cost retirees up to £40,000.
In mid-October, the firm calculated what could happen to a 55-year-old person thinking of taking their full tax-free cash amount from a £100k pot, assuming returns of five percent after charges and a guaranteed income for life (annuity) rate of four percent:
- Leave the £100k pot to grow = £180,000 fund at age 67 (could buy around £7,200 a year guaranteed income for life)
- Take £25k (equivalent to 25 percent tax free lump sum) at age 55 and leave rest to grow = £135,000 fund at age 67 (£5,400 a year guaranteed income for life),
- By taking the 25 percent of the pot at age 55, the saver is giving up the chance to have 33 percent more income at age 67. Effectively, the cost of taking £25,000 is a pension that is worth £40,000 less 12 years later.