120,000 individuals made lump-sum withdrawals from their pensions as soon as they could last year*, up 10% on the previous year, says Lubbock Fine Wealth Management, the wealth management arm of Chartered Accountants and business advisors Lubbock Fine.
The total value of those lump sum withdrawals by people aged 55-56 hit a five-year high of £2.2bn, also up 10% from £2bn.
Lubbock Fine says rising cost-of-living pressures are likely pushing many individuals to access their pensions early, raising concerns that they could run out of money later in life. Increased life expectancy and growing healthcare costs increase the chances that individuals could spend their way through their pensions too quickly.
Andrew Tricker, Director at Lubbock Fine Wealth Management, says: “The large numbers of savers withdrawing from their pensions before actually retiring is very concerning. Many of them are withdrawing too much – and too early.”
“People are living longer than ever so funding a retirement has never been more expensive – money withdrawn early will need replacing. Decisions made at 55 can have serious implications when you’re in your 80s.”
A total of £15.3billion was withdrawn as lump sum payments, by all age groups, over the same period.
Inheritance tax increase could accelerate trend of early withdrawals
Tricker adds that this trend for lump sum withdrawals from pensions may accelerate due to recent changes to inheritance tax (IHT) rules. From April 2027, most unused pensions and death benefits will be included in the value of an individual’s estate. This makes pensions a less effective tool for passing on wealth.
Since IHT isn’t due on gifts made seven years before death, these changes may encourage individuals to withdraw money from their pensions early and gift it to their family or friends. This will reduce their estate’s value – and thus their IHT bill.
Lubbock Fine cautions that people should be aware of the tax consequences, particularly the Money Purchase Annual Allowance (MPAA). The MPAA is triggered when taxable income is taken from a defined contribution pension using a flexible payment option.
If taxable income is taken in addition to the available 25% tax-free lump sum allowance, then the MPAA applies and the annual allowance is reduced to £10k (from £60k or 100% of earnings, whichever is lower). This lower allowance also applies to employer pension contributions.
Says Andrew Tricker: “People dipping into their pension pots at 55 must do so with extreme care. Triggering the MPAA can drastically reduce what you can contribute to a pension moving forward – something that often catches people out later in life.”
Increasingly more people are withdrawing from their pensions aged 55 amid cost of living pressures
* Year end March 31 2024
