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More than three-quarters of people ‘dipping into pensions before retirement’

More than three-quarters of people with defined contribution (DC) pension pots have already dipped into them by the time they retire, data from a pension provider indicates.

Scottish Widows said that 78% of people took money from their pots early, withdrawing £47,000 on average.

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

Scottish Widows analysed workplace pension scheme customers’ behaviour across more than 230,000 different retirement claim transactions between 2019 and 2023.

It also looked at how much the average £47,000 withdrawal could grow by if it remained invested for longer.

Draining a pension pot too soon can carry risks which both providers and retirees should be taking steps to guard against where possible

Graeme Bold, Scottish Widows

Scottish Widows estimated that if the money remained invested from age 55 – the age at which people with a DC pension can start to withdraw money under the pension freedoms – for an additional five years, they could potentially have around £13,900 more on average by the time they reach 60.

That figure could potentially rise to around £24,600 if it were to stay invested for 10 years to age 65 and to more than £38,000 if someone stayed invested to the age of 70, according to the projections.

How much people could end up with in reality would depend on howmarkets perform.

Scottish Widows used economic scenarios for its modelling, taking into account factors such as interest rates, inflation and currencies.

Graeme Bold, workplace pensions director 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.”

Earlier this week, Sir Steve Webb, a former pensions minister who is now a partner at LCP (Lane Clark & Peacock), cautioned that some home buyers could be gambling with their retirement prospects by taking on ultra-long mortgages.

He obtained freedom of information (FOI) data supplied by the Bank of England, showing that 42% of new mortgages in the fourth quarter of 2023 – or 91,394 – had terms going beyond the state pension age.

Legal & General Mortgage Services said this week that in the first quarter of 2024, there was a 13% increase in people aged 56 to 65 looking to move into home ownership, compared with the same period last year.

The data was taken from Legal & General Mortgage Services’ Ignite platform, which is used by brokers to source mortgage product information.

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