The dangers of early pension encashment

Story

Thousands are cashing in their pensions early and face running out of money in retirement. 

The Personal Finance Society (PFS) recently revealed that thousands of retirees are fully encashing their pension pots at an early age. As a result, many are facing the risk of running low on funds due to rapid spending. In April 2015, pension freedoms came into force which meant that people could gain full access to their pension at the age of 55. Since the act came into play, a total of £17.5bn has been taken from pension savings. Furthermore, the Financial Conduct Authority (FCA) discovered that 72% of pension pots accessed were held by people under the age of 65.

The main issue is that retirees appear to be splashing out on large purchases such as cars and holidays without considering the effect this could have in later life. Keith Richards, PFS chief executive stated that one of the reasons for pensioners running low on funds is that they are “underestimating their longevity” and went on to warn that “many retiring workers could be faced with the realities of self-deprivation if the funds are exhausted too quickly.”

The Office of National Statistics has noted that life expectancy in Britain has reached its highest level and that those born in the next generation will most likely live beyond the age of 100. Therefore, it seems vital that everyone approaching retirement educates themselves to ensure that they’re covered for their later years to avoid facing avoidable financial hardship.

In addition to this, many seem to be unaware that plowing through your pension could threaten your chances of being eligible for valuable state benefits. In the UK, the diminishing notional capital clausemeans that pensioners could have reduced, or even zero, assistance from the Government towards benefits such as residential care costs if they have consciously ‘wasted’ their pension away. The Department for Work and Pensions requests documented evidence from claimants such as receipts to view what their purchases consist of. From this they will assess whether the rapid loss of funds was done deliberately.

Seeking independent financial advice could be a helpful solution to ensure you’re less likely to run the risk of prematurely emptying your pension pot. The International Longevity Centre - UK found that those who gain financial advice are, on average, £40,000 better off than those who don’t. Speaking to a financial adviser could help make you aware of all your options, and assist with puttinga financial plan in place as you approach retirement. For example, you may discover that after taking financial advice, it could be more practical to take your pension as a regular monthly income rather than a lump sum. The solution most suitable for you will depend on your personal circumstances.

If you’re concerned about your retirement, or  would like to discuss retirement planning, call us on 01527 577 775 and we will be able to put you in touch with one of our expert independent financial advisers who can guide you through your options. You can also find out more about pensions here www.pensionwise.gov.uk/en.


This is for generic information only and is not suggesting a suitable investment strategy for you. You should seek independent financial advice that takes your individual circumstances into account prior to proceeding with any course of action.

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