A fifth of individuals entry their pension at 55: Do YOU know the dangers of doing so?
- Some 21% take out cash as soon as they are allowed to do so
As many as one in five people choose to access their pensions as soon as they reach 55 – with many not understanding the consequences of doing so.
Some 21 per cent withdraw money from their pension pot as soon as they are allowed to do so, data from pension and insurance firm Legal & General reveals, with as many as 10 per cent choosing to take out their entire pension.
In comparison, two thirds of those withdrawing money only took 25 per cent in order to stay within the tax-free allowance.
While some 32 per cent of people who took a lump sum from their pot said they did so to cover essential expenses, such as paying off debt, a larger number, 46 per cent, said they choose to access their pension ‘because they could’.
This may not be the best idea, because withdrawals over 25 per cent may be taxed and may affect eligibility for some benefits. In addition, if the money remains invested, the pot can continue to grow.
Cashing in: A fifth of people take a lump sum from their pension at the age of 55
Katharine Photiou, managing director of workplace savings at L&G, said: ‘People cash out their pension for different reasons, whether it’s to cover essential expenses or simply because they can.
‘But withdrawing without seeking advice or guidance can lead to unexpected consequences, like paying more tax or even losing access to benefits.’
Accessing pension can affect benefits and tax
The research, which surveyed over-50s, revealed that more than a quarter of people chose to make pension decisions without seeking advice from a professional.
In some cases, accessing a pension lump sum can affect a person’s eligibility for means-tested benefits – something that 24 per cent did not realise.
One in ten of those who did withdraw money from their pension later found that their benefit entitlement was directly impacted by this.
While you are able to withdraw 25 per cent of your pension pot at age 55 tax-free, the remaining 75 per cent will be taxed the same way that regular income is.
This means that you will be liable to pay income tax in whatever band your income places you in.
If your pension withdrawal is large enough, this could even mean that you enter a higher tax bracket, paying 40 per cent over £50,271, and 45 per cent over £125,141.
On top of this, taking money out of your pension early will also stifle its ability to grow in the long term.
If you can afford to wait for another ten years then you could benefit from thousands of extra pounds worth of growth over that period.
Tellingly, 18 per cent said they would withdraw less or no money at all at 55 if they could go back and make the choice again.
Financial charity Turn2us offers an online benefits calculator that can help customers check their entitlement and how withdrawing from their pension could affect this.
Photiou said: ‘For anyone considering taking a lump sum from their pension, there’s free support and guidance available, but as our research has shown, this is often underutilised.
‘Our partnership with Turn2us will help customers get to grips with their entitlement to state benefits, which is especially important for those with modest retirement savings.
‘By offering digital tools and resources, we hope to help people to make more informed decisions as they approach retirement.’
