Hot Features
Premium
Register for Free to get streaming real-time quotes, interactive charts, live options flow, and more.
Early pension withdrawals are becoming more popular in the United Kingdom, but is it a good idea to access your pension pot earlier?
With the minimum age to access your private pension in the United Kingdom rising from 55 to 57 in 2028, more retirement savers are prioritising a flexible approach to building their pots for later in life.
Recent findings from the Department for Work and Pensions (DWP) have shown that seven in 10 of the 3 million savers who have withdrawn their funds flexibly since the 2015 pension freedom changes were under 65 years of age. While this figure shows that UK savers crave earlier access to their savings, there are fresh fears that the trend could leave more pensioners hard-up for cash as they get older.
As much as 43% of all flexible payments were made to individuals under 60 years old. With the UK life expectancy surpassing 81 years of age on average, early withdrawals are raising concerns about pension adequacy among residents.
The temptation to access funds earlier remains high for many savers, so what precautions should you take if you’re thinking about withdrawing your pension pot at a younger age? Let’s explore three key considerations you should keep in mind when it comes to accessing your pension:
Take Your Total Retirement Income Into Account
Critically, withdrawing from your pension early, even if you wait until after age 55, means that your funds will have to stretch further while having less time to grow as you get older.
As the UK life expectancy continues to creep higher, your pension will likely need to last for multiple decades at least. Withdrawing money early increases the threat of you running out of funds later in your retirement.
Even if you’re only planning small withdrawals, they can carry a significant long-term impact on your total retirement savings. Additionally, taking larger lump sums may push you into a higher tax income bracket, meaning you’ll pay more in tax during your retirement.
With a ‘minimum’ retirement standard estimated to be worth £13,400 a year for a single individual and £21,600 for couples, it’s worth ensuring that you’ll have at least enough in your pension pot left to cover your expenses per year to have the retirement you want later in life.
Beware Early Withdrawal Charges
There are plenty of financial risks when withdrawing your pension early. The current rules on pension withdrawals before the retirement age, which is currently 55 but is set to rise to 57 from April 2028, are that you can be taxed up to 55% for what HM Revenue & Customs deems an ‘unauthorised payment.’
Some mitigating circumstances allow you to withdraw from your pension pot early without suffering heavy tax charges. If you have to retire early due to serious ill health, you can bypass the 55% tax charge from HMRC. You may also find that you’re enrolled in a scheme that gave you the right to access your money earlier than 55 due to having a ‘protected retirement age’ in your old pension.
However, in many cases, you’ll be taxed heavily on early withdrawals that fall before the retirement age. If you come across a service that claims to ‘unlock’ your pension before the national retirement age, it’s likely to be a scam that will charge excessive fees and still incur a 55% tax bill. In some cases, pension savers have lost up to 85% of their pension pot using these scam services, so you must remain vigilant about using companies to access your pension earlier.
Always Seek a Second Opinion
If your circumstances mean that you’re looking at accessing your pension pot sooner rather than later, it’s a good idea to seek expert guidance from your financial adviser and to explore your options.
Regulated financial advisers can better understand your specific circumstances and how an early withdrawal would impact your long-term access to pension funds. You may also find that contacting your pension provider for more clarity on withdrawal rules can help you to make a decision that aligns with your financial goals.
Free government resources like Pension Wise can offer impartial advice for anyone over 50 years of age with a defined contribution pension plan.
Should you feel that you need to access money now, impartial financial advice can help you to balance your debt, improve your budget, and assess whether you’re eligible for state benefits to support your needs in the here and now while protecting your pension over the long term.
Time to Withdraw Your Pension?
Withdrawing your pension early opens the door to the risk of having less in your pot to fall back on later in life. Try measuring out how much money you feel that you’ll need for a comfortable retirement and avoid eating into your total figure.
There’s no one-size-fits-all answer when it comes to deciding when the time’s right to withdraw your pension, but with the right advice and understanding of your financial goals, you’ll have the best opportunity to enjoy your retirement without the risk of struggling further down the line.
