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Pension warning over risk of poverty in your retirement – check you have enough set aside

More than one in four are dipping into their pension pots before retiring from work as they battle to cover living costs, according to a new study.

A third of this group said they needed the income to cover essential expenses, perhaps because of redundancy and the difficulty in finding a new job in your 50s.

And some eight percent of these “early dippers” said they regretted it because it hit the size of their pension, according to the survey by financial services firm Just Group.

Many people take a lump sum out of their pension pot, which is currently permitted after the age of 55, to pay off debt such as a mortgage.

However, some do so for more frivolous reasons such as a “once in a lifetime” holiday.

People nearing retirement need to be aware that the minimum age you can start accessing private pensions will rise from 55 to 57 overnight on 6 April 2028.

This means people in their mid to late 40s and early 50s need to plan ahead if they want to retire early or tap pension savings for other important expenses.

Despite the legal change, raising the age from 55 to 57, some personal and work pensions will continue to allow people to take money at 55 so it is important to check your own schemes.

There is a strong incentive for people to raid their pension nest eggs as the first 25 percent of a withdrawal is tax free. However, there are also some important downsides.

Removing the cash will restrict the size and future growth of the pot, dramatically reducing monthly pension payments.

There is an important tax restriction that comes into play when you start tapping a defined contribution pension – one which was invested to provide a pot of money at retirement – rather than a defined benefit pension which pays a guaranteed income for life.

Once you take any amount over and above your 25 per cent tax free lump sum, you are only able to put away £10,000 a year and still automatically qualify for valuable tax relief from then onward.

Alarmingly, ust Group found that 49 percent of people who accessed their pension before retirement, either by taking a lump sum or starting regular withdrawals, did not receive any advice or guidance before making the decision.

Some 27 percent consulted a financial adviser, 12 percent spoke to friends and family, and 9 per cent read media articles.

Just’s survey revealed:

– 28 percent of over-55s withdrew money from their pension before they retired;

– Our of this group, 32 percent needed the income to bridge the gap to state pension age or because of redundancy or lower earnings;

– 52 percent said they had retired sooner than they had expected, though it was not clear if the money taken from their pension was key to helping them do this;

– ​45 per cent of those making withdrawals from their pension before leaving work said they just took tax-free cash, but a third did it to supplement their income;

– One in 10 early pension dippers used the free, Government-backed guidance service Pension Wise, either with a telephone or a face to face appointment.

Stephen Lowe, a director at Just Group, said: “It seems that accessing pensions before retiring from full-time work is helping significant numbers of people cope with rising day to day living costs and sudden or unexpected events such as redundancy or ill-health.

“Whether taking pension money before retiring is a good or bad decision depends on people’s individual circumstances, but it’s important to remember that pension money taken and spent before retirement will not be available to provide income later in life.

“When times are tough the pension pot can look like an easy solution to an immediate problem – but it’s important that isn’t the default solution. People may well have other options.”

Tips for people wanting to take cash out of their pension before stopping work

– Check whether state benefits might be available to provide extra income. See the box above for This is Money guides to benefits.

– Work out how to make pension withdrawals in the most tax-efficient way.

– Take advantage of the Government’s free, independent and impartial guidance service Pension Wise, which can give an overview of options in the run up to and at retirement.

– The Government’s MoneyHelper and charities such as Citizens Advice and Age UK can also assist.

– Professional advisers will charge but can provide regulated advice alongside information about benefit eligibility.


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