Legal & General’s research reveals that 21% of individuals withdraw a cash lump sum from their pension pots immediately upon turning 55, often without fully understanding the potential long-term consequences. This includes both those accessing up to the tax-free allowance (typically 25% of the pension pot) and those withdrawing amounts beyond this threshold. Such early withdrawals can lead to unexpected tax liabilities, reduced eligibility for means-tested benefits, and increased risk of financial insecurity in later years. 

Risks of accessing pension without advice

Alarmingly, 27% of UK adults aged 50 or over make decisions about their pensions without seeking advice or guidance, exposing themselves to risks such as: 

  • Beyond the tax-free cash allowance, withdrawing large sums can push individuals into a higher tax bracket, resulting in unexpected tax bills. 
  • 24% of retirees were unaware that accessing pension funds could affect their eligibility for means-tested benefits, while 11% had already experienced a direct impact on their entitlement. 
  • Taking out substantial amounts early can leave retirees with less financial security later in life, as their remaining pension funds may be insufficient to support their retirement needs. 
 Using Tax-Free Allowances Wisely 

To avoid unnecessary tax burden, 67% of retirees who accessed their pension withdrew 25% or less to stay within the tax-free cash allowance. However, 10% withdrew their entire pension pot, potentially facing higher taxes and reduced financial stability by limiting compound growth while increasing exposure to inflation and longevity risks. 18% later regretted taking out too much, reinforcing the importance of careful planning before making withdrawals. 

The True Cost of Early Pension Access

For some, accessing pension funds early is a necessity, covering household bills, debts, or unexpected expenses. However, withdrawing simply because the option is available can lead to long-term financial difficulties, including:

  • Running out of your pension too soon, leaving little or nothing for later life. 
  • Unexpected tax liabilities, reducing the actual amount received. 
  • Loss of benefits, impacting financial security. 
 How to Make Informed Pension Decisions 

Retirees can avoid common pitfalls by carefully evaluating their needs and seeking professional financial advice before accessing their pension. Expert guidance can help assess the tax implications, protect eligibility for benefits, and ensure financial stability in the years ahead. 

Balancing Flexibility and Long-Term Security 

While early pension access at 55 provides flexibility, it should be approached with caution. Some use it for essential expenses or to enjoy life while they are healthy and active. However, without a structured plan, early withdrawals can significantly reduce the funds available later, potentially leading to financial hardship in later retirement years. 

To discuss any of the issues raised in this article, please contact us Further information can also be found at gov.uk. 

Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.

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