Pension savers who withdraw cash ahead of the Autumn Budget on October 28 risk losing up to £32,000 in retirement income, according to new analysis from Standard Life and former pensions minister Sir Steve Webb.
The warning comes as more than £91bn was withdrawn from pension pots accessed for the first time last year, driven by tax uncertainty. Over 90 per cent of financial planners reported in September that clients had asked about taking money from their pension before the end of October and the start of November.
Why early withdrawal costs £32,000
Accessing your pension early automatically reduces the value of your pot, leaving savers thousands of pounds worse off. Analysis by Standard Life shows a 55-year-old earning an average salary of £42,000 a year with an existing pot of £100,000 could build a pot worth £164,000 by age 65. However, if they take 25% of their pot tax-free at 55, their total savings would be around £132,000 by 65 – £32,000 less.
Sir Steve Webb, former Liberal Democrats pensions minister and partner at pension consultants LCP, said: “In the last two years we have seen a rush of pre-Budget speculation leading people to make rushed decisions about their pensions.” He added: “In both cases these fears were unjustified and people may have done lasting damage to their retirement prospects as a result.”
Experts urge caution ahead of Budget
Sir Steve, who served under the Lib Dem and Conservative coalition government, said that while no one knows for sure what may be in the Budget, “hasty decisions on the basis of guesswork rarely lead to good outcomes”. He stressed that if you take out your lump sum, it’s important to ensure anything you don’t plan to spend immediately is also working hard for you, “otherwise you could lose out overall”.
“Money in a current account feels safe, but if it’s earning no interest and prices are rising fast, the spending power of your hard-earned savings will drop very rapidly,” he explained.
Standard Life warns of lasting impact
Emma Furlonger, managing director for workplace pensions at Standard Life, said: “Pensions are designed for the long term, and taking tax-free cash earlier than planned can have an impact well beyond the amount you take out.” She added: “Taking money out after markets have fallen could mean locking in investment losses, depending on how your pension is invested, so it’s worth looking at the bigger picture before making a decision.”
The Autumn Budget, to be delivered by Chancellor John Healey, has prompted widespread speculation about potential changes to pension tax relief. The warning follows similar pre-Budget fears in recent years, which Sir Steve said were unjustified and led to lasting damage for some savers.
