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A third of over-55s will spend their tax-free pension withdrawals within six months

Rebecca Goodman
Written By:
Rebecca Goodman
Posted:
Updated:
21/11/2023

Around one in three people who withdraw their tax-free pension lump sum will spend it all within six months, according to new data.

Those who are aged 55 and over can withdraw money from their pension and it’s possible to withdraw 25% of the money tax-free.

But the majority of people who take out this money as a lump sum will have spent it within a year, potentially leaving them short of funds for their retirement.

The tax-free sum can be taken out all at once or in stages, but the remaining 75% of a pension pot is taxable.

Just over one in 10 people said they expect to spend or have spent between 90% and 100% of their tax-free pension pot within half a year of withdrawing it.

There is also a financial gap between men and women when it comes to tax-free withdrawals. Of those asked by Standard Life, 37% of women who have taken out the tax-free sum at retirement, or who plan to do so, said it would be spent within six months compared to 29% of men.  

It comes as two thirds of those aged 55 and over are unaware that they are able to withdraw 25% of their pension tax-free. 

It’s up to the pension holder how they take their money out when they reach 55 but instead of withdrawing the tax-free sum in full, it can also be taken out in chunks which can help with budgeting. 

Another option is taking the lump sum as a way to reduce someone’s working hours and having a phased retirement rather than stopping work altogether. 

The total amount a person can pay into their pension and receive tax relief on is £60,000, or their total salary, whichever is lower. Tax is due on anything over this amount. Once a pension is paid out in taxable income, this amount then falls to £10,000 for most people. 

Standard Life is warning those who are thinking about taking out their pension to consider in full the tax implications and also their own financial situation, especially those who plan to carry on working while taking some of their pension money.

‘You’ll possibly run out of money later’

Dean Butler, managing director for retail at Standard Life, said: “Being able to withdraw a quarter of your pension pot tax-free is one of the great pension perks, and many people look to make the most of this once they reach the age of 55. It’s your hard-earned cash and you have a right to enjoy it, but it’s worth considering all your options before withdrawing.

“It can be tempting to spend the cash immediately, but remember your pension savings need to last you throughout your retirement – which will hopefully be longer than you think. Taking too much at once, or too early, could mean that you possibly run out of money later.

“In addition, leaving your pension savings invested for longer gives the opportunity for additional growth so it can make sense for some people to put off accessing their savings for as long as possible.”