• Tyrone Skipper

Are you dipping into your pension pot?

It's a toxic trend that's eating away at the financial security of more than a million people’s futures. Ever since new freedoms were introduced some four years ago, so many people have been plundering their pension pots simply because they are now accessible.

In fact, a total of £23billion has been taken out since 2015 as over 55s increasingly turn to their retirement savings in order to top up their incomes.

Tax rules were changed in 2015 and were designed to give people aged over 55 greater access to their pensions. Now, however, it seems that a myriad of issues has unfolded since then. The act of dipping into pension schemes has become the "new norm" in the wake of this radical overhaul, and it has just been getting worse ever since.

This trend indicates an incredible rate of growth in the utilisation of flexible payments. In the long run, the habit of using these payment options is nothing new and many people are just storing up trouble for the future. From a psychological standpoint, it's almost considered an impulsive behaviour trait. There are many reasons people dig into their pension pots, from settling outstanding debts from credit cards to topping up their monthly income as a consequence of poor money management. Either way, the early drawdown could have significant implications for income further down the line.

There's another trend that's following suit, however. While more people are accessing their money, the average amount that they are withdrawing has steadily decreased. The average withdrawal has fallen to £7,197 - the lowest amount since the pension freedom laws were introduced. Could this be an indication that financial management is still somehow a priority in people's minds?

There's another trail of thought - that this development in pensioner behaviour is in line with the changing ways that people think about retirement. These freedoms are giving rise to a more flexible transition into our golden years where people start accessing some retirement savings early on so that they can support a reduced working pattern.

Another reason why people dip into their pension pots is that they seek to pay off their mortgage with that extra cash. In fact, 316,049 homeowners with mortgages apparently plan to use a pension lump sum or income to pay off their mortgages.

This may be an indication that people are justifying pension pot dipping as a means of coping with financial constraints and economic troubles. Another way of looking at it is that they consider this a financially-savvy tactic that may prove to be worthwhile in the future.

The same research also found that almost a quarter (23%) of homeowners in the 51-65 age group are expecting to continue making mortgage payments after age 65 while a quarter of those is expecting to make repayments beyond the age of 70.

How will this gradually affect the financial well-being of retirees hoping for a stable future? Could it lead to detrimental consequences or will things turn out for the better? Whatever the outcome, dipping into your pension pot could very well prove to be a risky move. Consult your financial adviser before you make any rash decisions.


© 2019 by Mana Strategic Consulting.