Over three-quarters of savers withdrew cash from their pension pots before reaching their selected retirement age in recent years, a new report claim .
Research compiled by Scottish Widows showed the average amount withdrawn before retirement was £47,000, with many using the cash to keep on top of bills and higher living costs.
Around a fifth, or 21 per cent, of people extracted cash from their pensions nine to 10 years before their selected retirement age.
And this is likely to have cost savers dear, as Scottish Widows said leaving the money invested instead could have seen pension pots grow by an additional £25,000 on average.
Early money: Over three-quarters of pension savers withdrew cash from their pension pots before reaching their selected retirement age, Scottish Widows said
The investment firm’s study claimed 78 per cent of pension savers withdrew money early from their pots between 2019 to the end of 2023.
More than half of savers, at 52 per cent, who took cash out of their pensions early did so five years before their selected retirement age, the findings suggest.
Only 20 per cent waited until their selected retirement age before drawing down on their pension.
A selected retirement age refers to the date someone chooses to retire, but not necessarily the earliest they can access their pension pot. Rules on accessing work and private pensions mean that they cannot currently be tapped before the age of 55 but savers will soon have to wait until 57 to get at pension pots.
Why are savers tapping pension pots early?
Sweeping pension freedom reforms introduced in 2015 meant that rather than most people having to use work defined contribution or private pension pots to buy an annuity, they could keep them invested in retirement and draw on them instead.
The over-55s can withdraw lump sums or regular income from their pension pots whenever they wish.
Each time a lump sum of money is taking out of a pension early, 25 per cent is typically tax free. However, the rest is added to any other income and is taxable.
Britons have withdrawn £72.2billion since being handed the freedom to manage their own money, according to figures from HM Revenue & Customs.
The minimum age you can start accessing most pensions will rise from 55 to 57 on 6 April 2028.
Many are spending their early withdrawals on day-to-day costs, amid higher inflation and living costs, Scottish Widows said.
However, it added that others were splashing the cash on holidays and fun after a turbulent few years.
Graeme Bold, workplace pensions director at Scottish Widows, said: ‘Our data shows that the vast majority of people withdraw money from their workplace pension before reaching retirement age.
‘Whilst early withdrawals are often an unavoidable necessity, draining a pension pot too soon can carry risks which both providers and retirees should be taking steps to guard against where possible.’
He added: ‘More needs to be done to encourage people to keep their pensions invested for as long as possible. It’s up to pension providers to have the support in place for people through a lifetime of investment – before, during and after they reach retirement age.’
Scottish Widows analysed workplace pension scheme customers’ behaviour across over 230,000 different retirement claim transactions between 2019 and 2023.
Last month, data from the Financial Conduct Authority suggested more over-55s were tapping their pensions and over half were cashing them out entirely. Part of this was credited to a savers fully cashing in small pots, however, rather than their main retirement fund.
Nearly 740,000 pension funds were accessed in the 2022-23 financial year, up around 5 per cent from the year before, as people struggled to pay household bills in a period of rising inflation.
Some 56 per cent of pots were being cashed in full – the majority of them worth £10,000 or less, according to the FCA.
Scottish Widows said people take an average of £47,000 out of their pensions early
How much are pension savers missing out on?
The Scottish Widows findings suggest pension savers took out an average of £47,000 from their pension pots before their selected retirement age in the last few years.
Financial modelling from Scottish Widows showed that leaving this sum of £47,000 invested in a pension until you are 65 could boost it by more than half, or nearly £25,000.
Scottish Widows said: ‘If the money stayed invested from age 55 (when the member would have first been able to take benefits) for an additional five years, they would have £13,925 more on average by the time they reach 60.
‘That figure rises to £24,661 if it were to stay invested for 10 years to age 65 – a rise of more than 50 per cent; and to more than £38,000 if invested to age 70.’
It added: ‘A separate modelling exercise was conducted under the assumption that members claimed the maximum tax-free cash available at age 55 which currently stands at 25 per cent, equivalent to £11,750.’
If the same modelling was run with the remaining £32,250 left in members’ pots after taking the tax-free cash, savers would on average be £10,441 better off after five years, and £18,496 after 10 years if they decided to stay invested, according ton Scottish Widows.
Taking money out of a pension early is not a step to be taken lightly. There can be tax implications and a potential impact on your finances in later life. It’s sensible to get professional financial advice if you are considering this option.