Getting real about withdrawing cash from pension savings

Pension scammers won’t be eradicated until all retirement savers get real about their financial options.

A recent survey found the most popular reason for pulling cash out of pension savings is investment to generate an income in retirement. Holidays and travel came next, followed by stashing emergency cash in a bank account. Helping relatives in need, repaying debts and home improvements were the other reasons stated by respondents, but some if the above are far from being sensible options.

According to the report, far too many savers overestimate the amount they’ve put aside for emergencies, as inflationary pressure can erode its value. In addition, withdrawing emergency funds from a pension should take no longer than taking the required amount from a savings account. As regards paying off debts, it’s often more of a personal choice rather than a necessity, and is done without giving consideration to a comparison between the cost of servicing a debt as against the annual growth of the pension fund.

Perhaps the biggest argument against taking withdrawals for any reason is the tax implication involved. The first 25 per cent withdrawn from a pension is normally tax free, but future withdrawals will be taxed as actual income, with the amount added on to any other taxable sums such as wages. For those in well-paid professional jobs, such a withdrawal could tip their tax liability over to 40 or even 45 per cent, hitting hard on the amount withdrawn.

A further valid reason for limiting withdrawals from a pension pot is everyone’s old enemy, inflation, coupled with the present-day increase in life expectancy. Running out of pension funds before you depart this life is a reality for many already, although no-one can calculate the risk with any certainty. At present in the UK, increasing numbers of pensioners are being forced back to work by financial necessity, including some who’d taken early retirement at age 50 or 55, hoping their pension pot would see them through as an expat in a cheaper country. Others have lost their savings after being conned by pension scammers.