More than three-quarters dip into pension pots early

More than three-quarters of people with defined contribution (DC) pension pots have already dipped into them before retirement, according to Scottish Widows.

Analysis of the workplace pension scheme customers’ behaviour, across 232,654 different retirement claim transactions between 2019 and 2023, revealed that only 20% wait until their SRA before drawing down on their pension.

The data revealed that the average amount a customer withdraws by age 65 is £47,000. Financial modelling by Scottish Widows shows how much that £47,000 could grow if it remained invested for longer.

Scottish Widows says that if the money stayed invested from age 55 (when the member would have first been able to take benefits) for an additional five years, they would have £13,925 more on average by the time they reach 60. That figure rises to £24,661 if it were to stay invested for 10 years to age 65 – a rise of more than 50%; and to more than £38,000 if invested to age 70

A separate modelling exercise was conducted under the assumption that members claimed the maximum tax-free cash available at age 55 which currently stands at 25%, equivalent to £11,750. If the same modelling was run with the remaining £32,250 left in members’ pots after taking the tax-free cash, savers would on average be £10,441 better off after five years, and £18,496 after 10 years if they decided to stay invested.

Graeme Bold, Workplace Pensions Director at Scottish Widows, said “Our data shows that the vast majority of people withdraw money from their workplace pension before reaching retirement age. Whilst early withdrawals are often an unavoidable necessity, draining a pension pot too soon can carry risks which both providers and retirees should be taking steps to guard against where possible.

“As an industry, it’s crucial that we better understand pension holders’ behaviour, so that we can help them save enough for a comfortable retirement. More needs to be done to encourage people to keep their pensions invested for as long as possible. It’s up to pension providers to have the support in place for people through a lifetime of investment – before, during and after they reach retirement age.

“The pensions landscape is ever-changing – people are living longer which means pensions must cover longer retirements, and more people are choosing to phase in to retirement with part time work. Therefore, it’s essential that pensions are flexible enough to be fit for purpose in today’s world.”