SAVERS are being warned about a pensions mistake that could cost them £30,000 or more in retirement – including giving up free cash.
Experts are urging savers to make sure they have enough money to retire before dipping into their pension funds, as alarming new research shows almost a third withdraw cash before retiring.
You can access your pension savings at age 55, but many people retire much later and the official retirement age – the age at which you can claim the state pension – is currently 66.
But new research shows that many people are withdrawing money from their pension funds long before they retire, leaving them with less to see them through their golden years.
Research by pensions firm Just Group found that 28% of over-55s said they had withdrawn money from their pension before retiring, and a third of them said they needed additional income to close the gap before retirement. state retirement age.
By doing so, they are also effectively giving up free money for their retirement.
When you put money into a pension, it is invested on your behalf with the aim of growing the fund over time.
This means you will earn extra money towards your pension savings.
And the more you save, the greater the return; Therefore, by withdrawing the cash early, you will be giving up those returns.
If you withdrew just £1,000 a year from your pension between ages 55 and 66, you would have already lost £11,000 from your fund.
But because of the returns he would earn and the effects of compound interest (assuming 5% returns), he would have actually lost almost £15,000, Just Group calculated.
If you increased your withdrawals to £2,000 a year, your pot would be £22,000, but with returns and compound interest, you would actually have lost £29,834 in total, of which over £7,000 would have been free cash.
Experts have warned that a large number of savers already have too little saved for retirement to live comfortably for the rest of their lives after leaving work.
Single pensioners need at least £14,400 a year to cover essential living costs in retirement, while couples need £22,240, according to the Pensions and Life Savings Association (PLSA).
Meanwhile, those looking for a more comfortable retirement will need £31,300 a year, rising to £43,100 for a couple.
However, the typical pot size for someone aged 55 to 64 is just £107,300, according to data from the Office for National Statistics (ONS).
Stephen Lowe, group communications director at Just Group, said: “Our research shows that around a third of people over 55 received money from their pension before leaving work, some because they wanted to and some because they needed it.
“It appears that accessing pensions before retiring from full-time work is helping a significant number of people cope with rising daily living costs and sudden or unexpected events such as redundancy or ill health.
“Whether taking pension money before retirement is a good or bad decision depends on people’s individual circumstances, but it is important to remember that pension money taken and spent before retirement will not be available to provide income later in life.
What is compound interest and how does it work?
Compound interest is where your money earns interest or returns, increasing the size of the pot, which then earns even more interest or higher returns.
This gradually increases over time, meaning the rewards for leaving your money alone can be huge.
We recently revealed that research by Interactive Investor found that if you put £50 into your pension each year, you would accumulate £76,301 over 40 years, despite spending just £24,000 of your own money.
Craig Rickman, personal finance expert at Interactive Investor, says that because of the “attractive tax advantages” on offer, the most common way to save money for old age is to use a pension, but not everyone takes full advantage of this. .
“Saving enough for a financially comfortable retirement is no easy task,” he said.
“Perhaps the trickiest part is striking the right balance between living for today and financing tomorrow.
“None of us want to reach old age feeling like we haven’t made the most of our youth, but we also don’t want to end up with insufficient savings to retire on our own terms.”
Before withdrawing money from your pension while you are still working, it is worth checking whether you will have enough to retire first.
If you withdraw some cash early, you may need to modify your retirement plans or work a little harder.
How else can I get more money for retirement?
If your pension savings seem a little thin, it may be worth checking to see if you have any funds you’ve forgotten about.
Millions of workers are estimated to have lost their pension funds, with around one in 10 workers having lost a fund worth £10,000, according to research by PensionBee.
We recently revealed how one saver found a whopping £100,000 in old pensions from factory jobs he had forgotten about and is now planning to travel the world.
There are several other services available to help you locate them, including the government’s Online Pension Tracking Service (or call 0800 731 0193).
Pension company AJ Bell also has a service to locate old pension funds.
You can also try calling your former employer’s human resources department to request details of your old pensions.
Provide information such as the dates you worked, as well as your national insurance number.
If you have a spare room in your house or like to sell products, you could earn some extra tax-free money.
Those who rent out a room in their home, for example through Airbnb, can earn up to £7,500 a year without paying tax.
There is also a £1,000 ‘business allowance’ for those who have a sideline such as selling products on sites such as Vinted or Depop.
The government’s free Pension Wise service can help if you’re not sure how to prepare for retirement.
What are the different types of pensions?
We summarize the main types of pension and how they differ:
- personal pension or self-invested personal pension (SIPP) – This is probably the most flexible type of pension, as you can choose your own provider and how much to invest.
- Work pension – The Government has made it mandatory for employers to automatically enroll you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are generally chosen by your employer and you will not be able to change them. Minimum contributions are 8%, employees pay 5% (1% in tax relief) and employers contribute 3%. - Last salary pension – This is also a work pension, but here what you receive when you retire is decided based on your salary and you will be paid a fixed amount each year when you retire. It is often known as a gold-plated pension or defined benefit (DB) pension. But employers no longer typically offer them.
- New state pension – This is what the state pays to those who reach state pension age after 6 April 2016. The maximum payment is £203.85 a week and you will need 35 years of National Insurance contributions to get it. You also need at least ten years to qualify for anything.
- Basic state pension – If you reach state pension age in April 2016 or earlier, you will receive the basic state pension. The total amount is £156.20 per week and you will need 30 years of National Insurance contributions to achieve this. If you have the basic state pension, you can also get a supplement from the so-called additional state pension or second state pension. Those who have accumulated National Insurance contributions under both the basic and new state pensions will receive a combination of both schemes.
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