Two million savers withdraw retirement cash before state pension age

Seven in 10 pension savers who have dipped into their retirement pots over the past decade were under the age of 65, according to new data, raising questions about whether people are taking money from their pensions too early.

Almost 43% of all flexible pension payments were made to those aged under 60, figures from the Department for Work and Pensions (DWP) show. A further 28% were made to people aged between 60 to 64.

Of the £103 billion taken as flexible payments since the 2015 ‘pension freedom’ rule changes, £36 billion (35%) was paid to those aged below 60. Nearly £29 billion (28%) was paid to those aged between 60 and 64.

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On average those aged under 60 took out £27,600. For retirees aged 60 to 64, this rose to £34,500.

These figures don’t include tax-free lump sum withdrawals, which potentially run into billions of pounds more.

Stephen Lowe, group communications director at the retirement firm Just Group, said: “Pension flexibility is double-edged – it can be done for good or bad reasons.

“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.”

Retiring before state pension age ‘new norm’

State pension age in the UK is 66 for both men and women. However, this age is gradually increasing. It will rise to 67 between 2026 and 2028, and then to 68 between 2044 and 2046.

The DWP’s figures showing the huge scale of withdrawals from pensions years before state pension age point to a trend of people retiring – or beginning to phase their retirement – before they reach this stage.

The minimum age you can take your pension – known as the normal minimum pension age – will increase from 55 to 57 in April 2028, a sign that the government sees a risk in giving access to pension money too early.

But changes to the rules around inheritance tax (IHT) – which will see defined contribution pension pots included in IHT calculations from April 2027 – is encouraging more people to spend their pensions, rather than pass them on to loved ones after death.

We look at whether, in light of the pension IHT changes, the 4% pension withdrawal rate rule is dead in favour of the 6% rule.

When the FCA first reviewed the impact of pension freedoms rules on retiree behaviour in 2017, it found almost three quarters (72%) of pots were accessed by savers aged under 65. Most took lump sums rather than a regular income. The FCA called this ‘the new norm’.

“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,” Lowe said.

“There is a massive blind spot in our knowledge. We don’t know how much tax-free cash is being taken. We don’t know why people are accessing pensions early or what they are doing with the money.

“The result is that we can’t tell how many accessing cash early are doing it for savvy financial planning reasons compared to how many are taking unsustainable amounts that will likely leave them short in the future.”

Anyone thinking of taking pension cash early should take steps to understand their options fully and the longer-term consequences of their actions as well as how they manage their money in retirement.

Professional advice from a financial adviser can help people think about the future, while those approaching retirement should take the free, independent and impartial guidance offered by Pension Wise. This gives a good overview about financial decisions for later life.