More than 225,000 retirees emptied their pension savings last year, potentially putting their retirement at risk, research suggests.
It is now 10 years since pension freedoms were introduced, letting savers access their pension pot as they wish.
But research by the Pensions Policy Institute (PPI) suggests some could now be mistakenly raiding their hard-earned savings without considering the long-term consequences to their wealth.
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The analysis found that more than 450,000 pension pots were accessed for the first time between October 2023 and March 2024.
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Of these, 51% were fully withdrawn as cash, while only 10% were used to purchase an annuity, reflecting low uptake of guaranteed income options.
With data from the Pensions and Lifetime Savings Association (PLSA) showing the cost of a comfortable retirement is at £43,100 per year, experts warn that there needs to be more awareness and guidance for those accessing retirement savings.
Mariana Garcia Requejo, senior policy researcher at the PPI, said: “As defined contribution pensions become the primary source of private retirement income, it is increasingly important that savers are supported to make sustainable choices.”
How are people accessing their pensions?
Pre-April 2016, the main option when retiring was to purchase an annuity or enter drawdown.
But since then-chancellor George Osborne introduced pension freedoms, savers have been able to choose how to access their pension pots.
This has meant fewer have purchased annuities, even despite rates hitting record highs recently.
Technically, a retiree could also take the whole lot of the pension as cash and the PPI’s report found that small pots are most likely to be taken as cash
Two thirds of full cash withdrawals were from pots worth below £10,000.
The risks of raiding your pension pot
With the cost of retirement and bills remaining high, it is no surprise that people want to access their pension pots.
But the PPI warns that taking everything as cash suggests savers may be making isolated, short-term decisions without considering the long-term consequences of potentially running out of money in retirement.
There are also tax risks as while you can take 25% tax-free, further withdrawals are subject to income tax and could even push you into a higher tax threshold.
Anita Wright, chartered financial planner at advisory firm Bolton James, warns that many retirees are making complex, irreversible financial decisions without adequate guidance.
She said: “While the appeal of immediate liquidity is understandable – particularly in the face of rising living costs or financial uncertainty – doing so can result in unintended tax liabilities, premature depletion of retirement savings.
“More critically, it reflects a behavioural shift where pensions are being treated less as vehicles for secure lifetime income and more as flexible savings accounts to dip in and out of, often to support discretionary or non-essential spending. This deviates from the core purpose of a pension, which is to replace earned income in later life when employment ceases.”
Beyond the risk of cashing out, the PPI also warns that many savers may mistakenly stay invested in accumulation strategies rather than altering their assets and making withdrawals in line with a retirement plan.
This means your pension portfolio could be taking too many risks, potentially eroding your retirement income.
Ross Lacey, director at Fairview Financial Management, said there are often misconceptions around what'll happen to the money if it's left in the pension.
He said: “This leads to people wanting to draw the pension out and stick it in the bank. So, they've effectively gone from something that was tax efficiently growing over the years to cash that'll sit in their bank account, earning very little and possibly being taxed.
“Pensions are so varied in terms of the features, costs, investment options, ways in which money can be withdrawn and death benefits that getting professional advice is often a great investment.”
Patrick Coyne, interim director of policy and public affairs at The Pensions Regulator, suggests that while workplace savings rules have helped people get started with a pension, there isn’t enough support for those looking to access the pot at-retirement.
He suggests there should be a guided retirement duty in the Pension Schemes Bill to provide products and services suitable for different kinds of savers.
He said: "Automatic enrolment built a nation of savers. Now we must move from a savings system to a pensions system, and that requires a 'sat-nav' for retirement which simplifies options and empowers savers to make informed choices.
"Without the right support, savers may find themselves forced to work for longer or find themselves strapped for cash when they should be enjoying older life.”
