Making pension withdrawals before retirement: Here’s what early dippers need to know

Nearly one in three over-55s make withdrawals from their pension before they stop working, industry research reveals.

Reasons for tapping retirement pots include smoothing the way to early retirement, but a third said they needed the income – in some cases due to redundancy or making up for reduced earnings.

Some 8 per cent of these ‘early dippers’ said they regretted it, according to the survey by financial services firm Just Group.

Taking cash out of your pension while still working can make financial sense, especially if you want to pay off debt like a mortgage, or fund another cherished goal, or can afford to start winding down with part-time work or a lower-paid job ahead of retirement.

But there are pitfalls, particularly if it will damage your future retirement finances, or you blunder into a tax mistake.

People nearing retirement need to be aware that the minimum age you can start accessing private pensions will rise from 55 to 57 overnight on 6 April 2028.

This means people in their mid to late 40s and early 50s need to plan ahead if they want to retire early, or tap pension savings for other important expenses.

It’s especially important to find out the age rules on your work and other personal pensions, because some people will continue to be able to access their funds at 55 depending on what they say.

Meanwhile, there is an important tax restriction that comes into play when you start tapping a defined contribution pension – one which was invested to provide a pot of money at retirement, rather than a defined benefit pension which pays a guaranteed income for life.

Once you take any amount over and above your 25 per cent tax free lump sum, you are only able to put away £10,000 a year and still automatically qualify for valuable tax relief from then onward.

This new and permanent limit is known in industry jargon as the ‘money purchase annual allowance’ or MPAA.

Just Group found that 49 per cent of people who accessed their pension before retirement, either by taking a lump sum or starting regular withdrawals, did not receive any advice or guidance before making the decision.

Some 27 per cent consulted a financial adviser, 12 per cent spoke to friends and family, and 9 per cent read media articles.

Just’s survey revealed:

– Some 28 per cent of over-55s withdrew money from their pension before they retired;

– Our of this group, 32 per cent needed the income to bridge the gap to state pension age or because of redundancy or lower earnings;

– And 52 per cent said they had retired sooner than they had expected, though it was not clear if the money taken from their pension was key to helping them do this;

– Some 45 per cent of those making withdrawals from their pension before leaving work said they just took tax-free cash, but a third did it to supplement their income;

– One in 10 early pension dippers used the free, Government-backed guidance service Pension Wise, either with a telephone or a face to face appointment.

Just Group surveyed around 1,000 UK adults aged 55-plus who were retired or semi-retired.

‘It seems that accessing pensions before retiring from full-time work is helping significant numbers of people cope with rising day to day living costs and sudden or unexpected events such as redundancy or ill-health,’ says Stephen Lowe, a director at Just Group.

‘Whether taking pension money before retiring is a good or bad decision depends on people’s individual circumstances, but it’s important to remember that pension money taken and spent before retirement will not be available to provide income later in life.

‘When times are tough the pension pot can look like an easy solution to an immediate problem – but it’s important that isn’t the default solution. People may well have other options.’

Lowe offered the following tips to people wanting to take cash out of their pension before stopping work.

– Check whether state benefits might be available to provide extra income. See the box above for This is Money guides to benefits.

– Work out how to make pension withdrawals in the most tax-efficient way.

– Take advantage of the Government’s free, independent and impartial guidance service Pension Wise, which can give an overview of options in the run up to and at retirement.

– The Government’s MoneyHelper and charities such as Citizens Advice and Age UK can also assist.

– Professional advisers will charge but can provide regulated advice alongside information about benefit eligibility.

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