Older workers warned not to raid pensions in haste

Covid-19 pressures lead many to access their retirement pots, but the long-term costs of doing this can be huge.

Older workers are being warned against rushing to raid their pensions to make up for lost income if they have been put on furlough or lost their jobs.

Ongoing uncertainty during the pandemic means employees could see their pay drop if they are furloughed or even find themselves unemployed.

It may be tempting, if you are over 55 years old, to consider using pension freedom rules so you can access the cash in your retirement savings to boost your income.

Government data suggests this may be happening, with HM Revenue & Customs figures showing 347,000 people withdrew from their pensions between July and September 2020.

This is up 6% annually and a 2% quarterly rise, which experts say is unusual.

Additionally, research from the Association of British Insurers trade body has found the number of people accessing their pension pots to withdraw flexible income increased by 56% between April and September this year.

Jonathan Watts-Lay, director of workplace financial education provider Wealth at Work, says employees should explore all other options before raiding their pension.

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He says employees must consider tax charges on withdrawals beyond the 25% you can initially take tax-free, and warns of the risk that your pension pot may not last your retirement if accessed too early.

Watts-Lay adds: “In a situation where someone is really struggling to make ends meet, and has no other options, accessing their pension early could be a solution to consider, however it really should only be a last resort. 

“It is important that employees consider all other options such as using non-pension savings, cutting back on expenditure or taking debt payment holidays through the government-backed recently extended mortgage holiday and debt repayment deferrals, and weigh up the best option for them to get through this difficult period.”

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Darren Cooke, chartered financial planner at Red Circle, agrees and says savers should seek advice or do their research through PensionWise before they take any withdrawals, so they understand the tax implications and restrictions on future contributions.

He adds: “That said, if you have lost your job you still have bills to pay. 

“While I would discourage people from taking money from their pension. I wouldn’t stop them. I see little point in living in poverty now to be rich later.” 

Cooke adds that the average withdrawal amount is below £5,000, which he says suggests people are taking just enough to get by.