Millions of workers warned of ‘epidemic’ over mistake that will cost them £54,000 in retirement savings

MILLIONS of workers have been warned of a mistake that could cost them £54,000 in retirement savings.

Workers can take money out of their pension while they are still paying in to it.

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This is a process often referred to as “flexible payments” and was introduced in 2015 when rules around how people accessed their pension were relaxed.

As it stands, from the age of 55, you can access your savings from your work or personal pension scheme.

It can be helpful if you need a cash boost to help pay off a mortgage or clear debts.

But tapping into your pension pot too early could mean you run the risk of running out of money.

That’s because your money has less opportunity to grow.

This does not apply to the government state pension, which is available to retirees once they reach 66.

Figures from the Department for Work and Pensions, which show total pension withdrawals between April 2015-2024, found that almost 43% of all flexible payments were made to those aged under 60.

Of the £103billion taken as flexible payments since 2015, £36billion was paid to those aged below 60.

Retirement specialist Just Group said the findings raise questions about “whether people are tapping into pensions too early in retirement”.

Stephen Lowe, communications director said: “Perhaps
if the FCA had called it an ‘epidemic’ it might be viewed in a different light and more steps taken to understand the consequences.”

“Ultimately pensions are primarily to provide retirement income and that money won’t be available in old age if people are using it to subsidise their lifestyle long before retirement.”

Money stowed away in pension pots is invested on your behalf with the aim of growing your pot over time, as investments tend to go up long-term.

Your money then benefits from compound interest.

This is where any returns earned on your pot are then reinvested, so you then make returns on a larger amount of money, and so on. Over time, this can see your money grow exponentially.

So if you take cash out, you’ve got less in your pension pot to invest, so your returns will be lower and you won’t benefit from as much compound interest long-term.

Just Group said workers aged under 60 could risk reducing their income by £54,000 if they tap into their savings early.

The average sized pension pot for people in this age bracket (age 55 to 60) is £75,000.

So for example, if you have a £75,000 pension at age 55 and didn’t touch it until 12 years later when you turned 67 (which would likely by the point you will be able to get the state pension), you’d be left with £136,500 pot, assuming 5% annual return after charges.

But if you withdrew a small amount each year to keep you going until the state pension kicks in at 67 – say, £2,300 a year – then your pot would shrink to £99,632 at this point. That’s a whopping £37,138 less.

Many people opt to buy an annuity in later life instead of managing their pension investments themselves. These products are becoming increasingly more popular – the number of annuities bought last year reached a record 10-year high of 89,600, according to the Association of British Insurers.

Annuities give you a guaranteed income when you retire that will be paid for the rest of your life – and people usually buy one with money from their pension pot.

But tapping into your pension pot early could have a huge impact on the size annuity you can buy.

A £136,500 pension could by you a £10,000 a year income from an annuity based on current average annuity rates, which is 7.3%. Over 20 years, that would give you £200,000 in total.

However, a £99,632 pension would only be able to buy you an annuity that would give you £7,300 a year. Over 20 years, that would give you £146,000, which is a whopping £54,000 less.

How can I take money out of my pension?

You can take up to 25% of your total pension as a tax-free lump sum, normally from the age of 55.

However, the maximum you’re allowed to take out in this way is £268,275.

There are other ways that you can take money from your pension pot.

Some providers allow you to withdraw cash directly from your pension pot, either in its entirety or as smaller cash sums.

You may also be able to buy an annuity from an insurance company that will provide you with regular payments from your pension for life.

You can ask your pension provider to pay for this out of your pension pot.

Some annuities will be for a fixed number of years, while some will continue to pay your spouse or partner after you die.

The amount you get will depend on how long the insurance company expects you to live for and how many years they’ll need to pay you.

They will take into account things like your age, gender and health, as well as interest rates and the size of your pension pot.

You can also invest into a drawdown, which is a way of taking money out of your pension pot to live on when you retire.

This gives you more flexibility over how and when you receive your pension.

You can take up to 25% as tax-free lump sum and the rest of your pension remains invested, meaning it can grow.

You can then choose whether you want a regular income or amounts as and when you need them.