Accessing your pension pots early: Are you impacting your financial future?

Retirement behaviours are shifting. 78% of retirees have dipped into their pension pots before they actually retire [1]. Whether it’s for unexpected expenses, the desire to be debt-free or the need for additional income.

The reality is that immediate financial needs can often overshadow the long-term benefits of leaving pension pots untouched. But the implications of withdrawing funds from your pension early are multi-faceted. In fact, it can have a significant impact on your financial future.

In this article, Nick Hooper, IFA, discusses the true cost of accessing your pension pots too early.

When should I access my pension?

In the UK, you can access some or all of your pension for the age of 55 (this will be changing to 57 from 2028 onwards).

If you choose to withdraw funds from your pension early, you could miss out on compound growth which could only be achieved if the money had remained untouched.

This can have a real knock-on effect to your overall pension. Meaning that you have a smaller pot to rely upon, further down the line. It’s often these later years in retirement when the need for stability is greater.

As life expectancy continues to grow, and retirement periods extend, it’s more important than ever to take the timing of your pension into account. This will help to ensure that you stay within your savings, with access to the funds you need.

What are the financial impacts of withdrawing early?

The average amount that an individual withdraws from their pension by age 65 is £47,000.

If we apply financial modelling to this number, we can see how much that £47,000 would increase if it had stayed invested. For just five more years, that individual would have accumulated £13,925 more. And if it were to stay invested for ten years instead of five, that figure is likely to surpass £24,661. An increase of more than 50%.

Assuming that the maximum tax-free cash available was used (at age 55 his currently stands at 25%, equivalent to £11,750). If the remaining £35,250 remained invested, you would on average, be over £10,400 better off after five years and nearly £18,500 after ten years.

Sometimes, early withdrawals will be unavoidable. But as these numbers show, draining your pension too soon can compromise your financial security in the future.

How can I build a financial safety net?

One way in which you can build a financial safety net is by diversifying your income streams. With different sources of income and investments, you can really reduce the need to dip into your pension funds too early.

Comprehensive financial planning also helps to ensure that you can maintain your desired lifestyle without compromising your finances upon retirement. By understanding the impact of early withdrawals and having alternative options, you can make informed decisions to benefit you in the long-term.

Supporting you with your pension and retirement plans

Dipping into your pensions early can severely impact your long-term financial security once you have retired. With this in mind, the safest bet is to seek financial advice from a professional before making any short-term decisions which could have long-term consequences.

If you are starting to plan for your retirement, or you are taking your pension options into consideration, it’s absolutely critical to know how early withdrawals can impact your financial security.

Get in touch with one of our advisers to delve into your options and create a retirement plan which is tailored to you and your goals.

[1] Scottish Widows conducted research into workplace pension scheme customers’ behaviour across 232,654 claims between 2019-2023. The data revealed that the average a customer withdraws by the age of 65 is £47,000 and that 78% of retirees have taken money from their pension pots before they reach their selected retirement age.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATEMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES AOF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 ONWARDS) UNLESS THE PLAN HAS A PROTECTED PENSION AGE.

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION SAVINGS ARE AT RISK BEING ERODED BY INFLATION.