According to research from Scottish Widows, more than three-quarters of retirees could be missing out on potential investment returns by accessing their pension before their retirement date. Understanding the implications of withdrawing money from your pension could help you to make a decision that’s right for you.

Read on to find out some of the areas you might want to consider before you access your pension for the first time.

You can usually access your pension at 55

Usually, you can withdraw money from your pension when you turn 55 (rising to 57 in 2028). For many people, that will be before their planned retirement date.

It can be tempting to access a portion of your retirement savings at this point, even if retirement is some way off. Indeed, the Scottish Widows survey found that 78% of people withdraw some money from their pension before they retire – 52% take funds five years before their retirement date and 21% withdraw money 9 to 10 years before.

On average, those accessing retirement savings while they’re still working withdraw £47,000.

There are lots of reasons why you might decide to access your savings before you give up work completely. Perhaps you plan to phase into retirement by reducing your working hours and are using a pension withdrawal to supplement your income. Or you might use the money to reach life goals, such as paying off your mortgage or taking a once-in-a-lifetime holiday.

However, taking money from your pension before you retire could affect your lifestyle once you give up work. So, it’s often important to consider the long-term impact. When you factor in investment returns, the effect could be greater than you expect.

Accessing your pension early could reduce its value by thousands of pounds

Typically, money held in your pension is invested. This provides an opportunity for it to grow over the long term. As a result, withdrawing funds from your pension early could mean its value is lower than you expect.

Scottish Widows calculates that if you withdrew £47,000:

  • Five years before your retirement date, you could miss out on £13,925 of investment returns
  • 10 years before you retire, investment returns could be £24,661 lower.

The figures assume investment returns of around 5%, which cannot be guaranteed. However, the data highlights the potential impact of withdrawing money from your pension sooner than planned.

So, when you’re weighing up the pros and cons of taking money from your pension, you may want to consider how lower investment returns could affect your income in retirement.

A financial plan could help you assess the effect of making a pension withdrawal

While withdrawing money from your pension before you retire could mean you miss out on investment returns, that doesn’t automatically mean it’s the “wrong” decision.

For instance, if you use the money to pay off outstanding debt, such as your mortgage, it could take a weight off your mind and improve your financial situation in the short and long term.

Alternatively, you might have enough to increase your disposable income to spend on experiences now without risking your financial security later in life.

What’s important is that you understand the potential implications of accessing your pension sooner, and if it’s the right decision for you. It can be difficult to assess as you might need to consider a whole host of factors, some of which are outside of your control.

If you want to understand how taking a lump sum or regular income from your pension could affect your long-term finances, you may want to consider:

  • Life expectancy
  • Future income needs
  • Potential care costs
  • How inflation could affect outgoings
  • Your ability to overcome financial shocks.

A financial plan and using tools, such as cashflow modelling, could help you understand how your decisions now could affect your future.

You might also want to look at other assets as well – could your savings or other investments be used to help you reach your goals instead of accessing your pension? A complete financial review may help you assess how to use your assets and wealth to balance short- and long-term goals.

Contact us if you’re considering accessing your pension before your retirement date

If you’re thinking about accessing your pension before your planned retirement date, we could help you assess the long-term implications. It could mean you have the information you need to understand which option could be right for you. Please contact us to arrange a meeting.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.