More than three quarters of people raid pension pots early – Scottish Widows

By Staff

Of those taking money out early, more than half (52%) withdrew funds five years before their selected retirement age, with a fifth (21%) opting to start taking out funds nine to 10 years before their retirement age

More than three-quarters of people with defined contribution (DC) pension pots have already dipped into them before retirement, according to Scottish Widows.

Scottish Widows said that 78% of people took money from their pots early, withdrawing £47,000 on average. More than half (52%) of those who took out funds did so five years prior to their selected retirement age (SRA), while a fifth (21%) began withdrawing nine to 10 years before retirement.

The analysis was based on the behaviour of workplace pension scheme customers across more than 230,000 different retirement claim transactions between 2019 and 2023. Scottish Widows also calculated how much the average £47,000 withdrawal could grow if it remained invested for longer.

They estimated that if the money stayed invested from age 55 the earliest age at which DC pension holders can start to withdraw under pension freedoms for an additional five years, they could potentially have around £13,900 more on average by the time they reach 60.

This figure could potentially increase to around £24,600 if it were to stay invested for 10 years until age 65, and to more than £38,000 if someone stayed invested until the age of 70, according to the projections. However, the actual amount people could end up with would depend on market performance.

Scottish Widows has crunched the numbers using economic scenarios, factoring in things like interest rates, inflation, and currency movements. Graeme Bold, who heads up workplace pensions at Scottish Widows, said: “Our data shows that the vast majority of people withdraw money from their workplace pension before reaching retirement age.”

“Whilst early withdrawals are often an unavoidable necessity, draining a pension pot too soon can carry risks which both providers and retirees should be taking steps to guard against where possible. As an industry, it’s crucial that we better understand pension holders’ behaviour, so that we can help them save enough for a comfortable retirement.”

“More needs to be done to encourage people to keep their pensions invested for as long as possible. It’s up to pension providers to have the support in place for people through a lifetime of investment before, during and after they reach retirement age.”

“The pensions landscape is ever-changing people are living longer which means pensions must cover longer retirements, and more people are choosing to phase into retirement with part-time work. Therefore, it’s essential that pensions are flexible enough to be fit for purpose in today’s world.”

This warning comes after Sir Steve Webb, ex-pensions minister and now partner at Lane Clark & Peacock, expressing concern that some home buyers might be risking their future nest eggs by committing to ultra-long mortgages. He managed to get hold of freedom of information data from the Bank of England, which revealed that 42% of new mortgages in the last quarter of 2023 a total of 91,394 had terms extending beyond the state pension age.

Legal & General Mortgage Services announced this week that there was a 13% rise in people aged between 56 and 65 looking to become homeowners in the first quarter of 2024, compared to the same period the previous year. The figures were sourced from Legal & General Mortgage Services’ Ignite platform, a tool used by brokers to find mortgage product information.

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