Paladin looks at the impact on your retirement of taking your tax-free lump sum


Desperate savers are raiding their pension pots to plug holes in their finances caused by the pandemic.

But calculations reveal that pulling out your tax-free lump sum will cost you dearly in retirement.

The latest figures show a rise in the number of people doing just that over the past three months and there are fears that many more could follow after a second lockdown.

Pension savings are locked up until you reach 55, at this age you can get your hands on every penny - or a 25 per cent tax-free lump sum.

However, the pandemic and deepening recession has caused much financial hardship, pushing many to dip into their pension funds early.

HMRC data shows a 2 per cent rise between July and September compared with the second quarter of 2020 and a 6 per cent increase compared with the same time last year.

Yet there are now fears many more could follow after a second lockdown.

Experts warn that you should only take money from your pension early only as a last resort because of the damage it does to the value of your fund when you come to retire.

Starting to take an income from your pension at age 55 rather than 65 means you lose out on some or all investment growth for ten years.

A pension pot worth £250,000 at the age of 55 could grow to £380,000 over another ten years, according to calculations by Aegon.

Using that £380,000 pot to buy an annuity at today's rates would give you an annual income of nearly £18,000. By contrast, the £250,000 pot would buy an income of just £8,700 a year.

If the saver chose to take the 25 per cent lump sum from the £250,000 pot at the age of 55, this would reduce the pot by £62,500.

But it would also cut the value of their final retirement pot to £284,000. This would mean the retiree could get an annuity income of £13,000 a year, rather than £18,000.

This is a big difference and the implications should be considered carefully before dipping into your retirement savings.

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