New research has revealed that many people risk depleting their pension savings nearly a decade before the end of their retirement, as some take large cash lump sums from their pensions in their 50s and withdraw too much in monthly income too early.
One in seven (15%) retirees viewed their pension lump sum as a financial bonus, while one in ten (10%) treated it like a payday and spent freely, according to new figures from Legal and General.
This could be as a result of ‘The Lottery Effect’ – overnight access to large sums of money can trigger a psychological rush which can spark impulsive or unsustainable spending – similar to winning the lottery.
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In fact, with the average 60-year-old expected to live until 86, some could face a nine-year financial shortfall.
Nearly half (46%) accessed their pension simply because they could, potentially missing out on long-term investment growth and exposing themselves to tax liabilities or loss of benefits.
On average, people have £87,500 in their retirement pot before they start accessing it. A third (32%) of people will take a cash lump sum once they are eligible to do so, on average at age 60.
Many take out the full 25% tax-free allowance and draw an average of £875 per month from their remaining savings—rates that may not be sustainable for a multi-decade retirement.
The impact can have a significant psychological impact on pensioners. One in seven (14%) retirees have regrets about how much of their pension they have accessed.
Alarmingly, 58% accessed their pension without seeking financial advice or formal guidance, and 11% admitted they did not fully understand the consequences.
When can you access a private pension?
You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. The most you can take is £268,275.
If you hold a protected allowance, this may increase the amount of tax-free lump sums you can take from your pensions.
The tax-free lump sum does not affect your Personal Allowance.
Tax is taken off the remaining amount before you get it.
When you can take your pension depends on your pension’s rules. It’s usually 55 at the earliest.
You might have to pay Income Tax at a higher rate if you take a large amount from your pension. You could also owe extra tax at the end of the tax year.
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