Pensioners could lose up to £63,000 by taking lump sum withdrawals too soon, experts have warned.
A 55-year-old with a £500,000 pension pot who withdraws their 25 per cent tax-free lump sum early could miss out on years of potential growth, new analysis shows.
Britons are being warned that hasty decisions driven by Budget speculation could leave retirees thousands of pounds worse off over the next decade.
Financial advisers at AJ Bell say they have seen a rise in anxious savers looking to access their pensions before possible tax changes are announced.
However, they are urging caution, warning that acting in panic could significantly reduce long-term retirement income.
AJ Bell’s analysis shows just how costly it can be to take pension money out too early.
A 55-year-old with a £500,000 pension who withdraws their 25 per cent tax-free lump sum – worth £125,000 – and puts it in a normal savings account could end up £63,000 worse off after ten years compared with leaving the money invested in their pension.
Even choosing a more tax-efficient option wouldn’t bridge the gap. Putting the same amount into a cash ISA using the £20,000 annual allowance would still leave a saver around £45,000 behind over the same period.
Those opting to maximise their stocks and shares ISA contributions would fare better but remain £18,000 worse off.
Pension warning as savers risk losing up to £63,000 after panic withdrawals
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GETTYThe analysis assumes six per cent yearly returns for both pension funds and stocks and shares ISAs after fees, whilst cash ISAs and savings accounts are projected at four per cent interest rates.
Tom Selby, director of public policy at AJ Bell, warned that speculation surrounding pension tax-free cash could “potentially cause untold damage to the retirement prospects of hard-working Brits”.
He emphasised that “Budget rumours have a direct impact on pension savers who have saved diligently throughout their careers under the proviso that they could access a tax-free lump sum of up to 25 per cent of their pot, often wreaking havoc with their longer-term retirement plans.”
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Budget rumours have a direct impact on pension savers who have saved diligently
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GETTYIan Futcher from wealth management firm Quilter echoed these concerns, stating: “Making a knee-jerk withdrawal risks locking in losses and missing out on years of potential growth that could be worth tens of thousands of pounds over the long term.”
Both experts stressed the importance of careful planning rather than reactive decision-making driven by speculation.
Under existing regulations, most savers can access 25 per cent of their pension tax-free from age 55, capped at £268,275. However, the Fabian Society, a think tank with Labour connections, has advocated reducing this limit to £100,000.
Government data reveals that 672,000 retirees withdrew £5billion from their pensions in this year’s first quarter
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GETTYGovernment data reveals that 672,000 retirees withdrew £5billion from their pensions in this year’s first quarter, marking a 25 per cent increase from the corresponding period last year.
This surge followed the Chancellor’s October Budget announcement that pension funds would lose their inheritance tax exemption from April 2027, potentially subjecting them to charges of up to 40 per cent.
Mr Futcher acknowledged that those with substantial pension holdings might have valid reasons for early withdrawals, particularly given the frozen tax-free threshold. However, he cautioned: “Those who act in haste or panic risk losing far more than they gain.”