"Withdrawing without seeking advice or guidance can lead to unexpected consequences, like paying more tax or even losing access to benefits."
- Katharine Photiou, managing director of workplace savings at L&G
One in five (21%) people who withdrew a cash lump sum from their pension pot did so as soon as they turned 55. However, many are doing so without fully understanding the long-term financial consequences, according to new research from Legal & General.
While some access a lump sum to cover immediate expenses, others simply take the money because they can. The research, which surveyed individuals over 50 to understand their retirement decisions and plans, shows that 32% of people who accessed their pension did so to cover essential expenses, while a larger proportion (46%) said they take the lump sum “because they could”.
Risks of cashing out without advice or guidance
The research highlights significant risks for those who withdraw funds without advice or guidance. Over a quarter (27%) of UK adults aged 50 or over make decisions about their pensions without seeking advice or guidance, leaving themselves exposed to unexpected tax bills or losing entitlement to means-tested benefits.
It also reveals that 24% of people who have withdrawn a cash lump sum didn’t realise that taking a lump sum could affect their eligibility for means-tested benefits, with 11% saying it had a direct impact on their entitlement.
Among those who did withdraw a lump sum, two thirds (67%) took 25% or less to stay within the tax-free allowance, while 10% withdrew their entire pot.
If given the choice again one in five (18%) would have withdrawn less or no money as a lump sum.
In response to these concerns, L&G is partnering with Turn2us, a national charity offering practical information and support to people facing financial insecurity. Through this partnership, L&G is signposting customers to the Turn2us Benefits Calculator, a tool designed to help customers check whether they are entitled to benefits and understand how changes to their circumstances may impact their benefit entitlement.
Katharine Photiou, managing director of workplace savings at L&G, commented: “People cash out their pension for different reasons, whether it’s to cover essential expenses or simply because they can. But withdrawing without seeking advice or guidance can lead to unexpected consequences, like paying more tax or even losing access to benefits.
“For anyone considering taking a lump sum from their pension, there’s free support and guidance available, but as our research has shown, this is often underutilised. Our partnership with Turn2us will help customers get to grips with their entitlement to state benefits, which is especially important for those with modest retirement savings. By offering digital tools and resources, we hope to help people to make more informed decisions as they approach retirement."
