Household bills and interest rates remain high for many, which may tempt older workers to cash in their pension early.
The rate of inflation may have slowed from double digits to close to the 2% target, but interest rates remain at above 5%, making it relatively expensive to borrow compared with recent years.
Meanwhile, household bills such as energy and council tax rise in recent years, while frozen tax thresholds put pressure on people's finances.
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The cost of a comfortable retirement has also hit £43,100 per year, according to the Pension and Lifetime Savings Association, meaning you will need more than just your state pension to enjoy your golden years.
A growing number of people are tackling rising costs by looking at another pot of cash they could tap into — their pension.
But there are risks when accessing your pot too early as you may run out of cash.
When can I take my pension?
Currently you can only cash your pension in after you turn 55. At this point you can withdraw up to 25% of your pension pot tax-free – either as a lump sum or in instalments – regardless of the size of your savings. In 2028, the age you can access your pension is increasing to 57.
When it comes to the other 75% of your pension pot, you have different options.
Annuities
You could buy an annuity. They provide you with a regular guaranteed income for the rest of your life or for a set number of years, depending on the type of annuity you purchase.
For years annuities were an unattractive option due to low interest rates, but they have surged to a 14-year high, boosting retirees’ yearly incomes, thanks to the Bank of England hiking the base rate in recent years.
Income drawdown
Income drawdown is where you leave some money invested – in the hopes the amount will increase – and take a regular income directly from the fund.
Leave it
Or you could not release it at all and instead let it increase in value until you decide you want to dip into it.
Watch out for retirement regret
Accessing your pot too early could mean running out of money later in your retirement.
Research by retirement specialist Just Group has found that around one in 10 retirees aged 55 and older who withdrew money from their pension before leaving full-time work say they regret it.
Its survey of more than 1,000 people found 28% had withdrawn pension cash between the age of 55 and when they finished working full time, either as a lump sum or through income drawdown.
Almost half said they received no financial advice or guidance.
It follows the FCA’s latest Retirement Income market data which signalled that more than a third of people who entered drawdown in the 12 months to March 2023 did not seek or use any advice and the number of people entering drawdown without advice or guidance rose by 16%.
“It's alarming that a significant portion of retirees are diving into their pension before leaving full-time work without the benefit of any financial advice or guidance,” says Stephen Lowe, group communications director at retirement specialist Just Group.
"The cost-of-living crisis, rising rent prices and hiked interest rates have all put a significant strain on household finances over the past few years, and for many, pension cash has been a valuable financial resource to fall back on, particularly for those who have faced health problems or redundancy prior to retiring.”
Many retirees following the 4% withdrawal rule.
This suggests that taking 4% out of your pension each year while remaining invested can ensure your pot lasts throughout your retirement.
Can I cash my pension in early?
If you want to cash in your pension before retirement, it gets a bit more complicated.
“There are only a few instances where savers can release their pension before the age of 55, such as extreme ill health or terminal illness,” says PensionBee. “If none of these circumstances apply, HMRC may view the early pension release as unauthorised, imposing a 55% tax charge on the amount withdrawn. No reputable pension provider will approve an early withdrawal unless these conditions are met.”
So while it might be tempting to look at your pension pot as a way to boost your income throughout the current crisis, the fact is you’d most likely be losing out. Because of the hefty HMRC charges most pension providers won’t help you release your pension early. Instead you’d have to turn to a third party who could charge up to 30% to do so. After that you’d only have 15% of your pension left.
There’s an increased risk with this too — most of the firms that arrange early pension release aren’t FCA authorised and so your money isn’t secure, says PensionBee.
In short — you can, but it’d be a long process that would ultimately not be worth it as you’d be giving up a larger sum in the future for a fraction of it now.
Be wary of pension scams
“There are numerous pension scams which claim to help savers access their pension before the age of 55 by exploiting loopholes in the system,” warns Pensionbee.
“Unless a saver meets some of the above criteria or has been explicitly informed by a provider that they qualify for early pension release, savers should never trust a third party to withdraw their pension on their behalf.”
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