Urgent warning to savers – pension mistake could cost you £30,000 when you retire

People are being warned to make sure they have all the facts or risk losing thousands of pounds when they retire. Experts say research has shown that one in three take money from pensions before they leave work.

However, most of them do so without any financial advice, putting them at risk of having no money when they eventually retire. Many of them say they were pushed to meet rising costs, while others say they used it to bridge the gap before the state pension kicked in.

Pensions specialists Just Group, which carried out the study, said they found 28 per cent of over-55s took money out of their pots before retirement. One in three said they would close the gap before reaching the state pension age, which is currently 66 but is due to rise to 67.

Under current rules, anyone over 55 can access their pension savings. But the longer you leave it untouched, the more you’ll have when you retire.

Just Group says if you withdraw £1,000 a year from your pensions between the ages of 55 and 66 you will have lost £11,000 from your pot, the impact is bigger than that. Because assuming you’ll have interest and returns on your pension investments of around 5%, that means you’ll actually have lost almost £15,000.

Increasing this to £2,000 a year will mean you have £29,834 less in the pot, after interest, than if you had left it. Stephen Lowe, group communications director at Just Group, said: “Our research shows that around a third of over-55s took pension money before they left work – some because they wanted to and others because they need it.

“Access to pensions before retiring from full-time work appears to help a significant number of people cope with rising day-to-day living costs and sudden or unexpected events such as redundancy or ill health. About 45% of those who withdraw their pension before leaving. Work said it was simply to take tax-free cash, but a significant minority of around a third do it to supplement their income.

“Whether taking pension money before retirement is a good or bad decision depends on people’s individual circumstances, but it is important to remember that pension money taken and spent before retirement will not be available to provide income later in life.”

He encouraged those considering using their pre-retirement pension money to get them through a difficult situation, such as a layoff or illness, to take a moment and think about whether it’s really for the best — or the only option. A good place to start is to first check whether state benefits might be available to provide additional income.

“If people decide to take a lump sum out of their pension then they should find the most tax efficient way to do it. When times are tough, the pension pot may seem like an easy solution to an immediate problem – but it’s important that this is not the default solution.

“People may have other options and it is important that they are fully aware of all the options available to them and understand how decisions made now may impact their lives 10, 20 or 30 years from now. those considering their pension options should take advantage of the government’s free, independent and impartial guidance service, Pension Wise, which can provide a useful overview of the options available in the lead-up to and into retirement.”

According to Pensionworks, for a comfortable retirement, people will need about two-thirds of their pre-retirement income to be financially independent.