Pensioners forced to test pension fund to bail out cash-strapped families | Personal Finance | Finance

Martin Lewis warns pensioners are losing money

Experts yesterday urged caution among those looking to access their pension money early to avoid the risk of a savings shortfall after retirement. Recent research reveals that almost a quarter of people (24 per cent) are already planning to use or plan to use their retirement funds to meet rising living costs.

One in seven (14 per cent) have accessed a pension fund for themselves, and one in 12 (8 per cent) parents say they have done so to support their children, data compiled by financial services firm Gillick & Co shows.

Will Stevens, head of financial planning at the firm, said: “We are in the midst of an unprecedented economic period, with inflation at its highest level in decades.

“As a result, many families are making difficult financial choices, including using long-term savings in their own budgets and covering shortfalls for their children.

“Some parents have no choice but to access these savings early or reduce contributions, significantly affecting the lifestyle they can afford in the future.”

Pensions expert and former minister Sir Steve Webb admitted there was “hard evidence” that increasing numbers of people were dipping into their pension pots.

Sir Steve, now a partner at financial advisers LCP (please reference LCP), said: “The latest figures from HMRC clearly show that the number of people withdrawing from pensions has risen by a quarter to 500,000 in the three months to June 2022 compared to the previous year.

“The withdrawals were between £3.6 billion and £2.9 billion.

Pensioners are required to test their pension funds

Pensioners are required to test their pension funds (Image: Getty)

“Therefore, there is hard evidence that people are accessing their pension pots at an early stage.

“The biggest thing to keep in mind when considering retirement withdrawals is that most people live longer than they expect.

“For example, I’m 57 years old and at my age I can expect to live into my mid to late 80s.

“For someone who has a modest pension to start with, if they start drawing it down, it means that later life is going to be very difficult.

“For example, there won’t be as many trips to see the grandkids or you might have to focus on paying the bills to take that vacation you’ve been dreaming of.

“Early withdrawal can mean the difference between a comfortable retirement and hardship for many people, where you don’t have the choices you want at that point in life.”

Former pensions minister Baroness Altman warned: “Please think very carefully before giving up on pensions.

“It may be the best or only option for some, but you may live to regret it. Sacrificing your retirement security is generally a bad idea if you’re in very poor health and have exhausted all reasonable means of paying your bills.

Two-fifths (40 percent) of people think the cost-of-living crisis, driven by inflation at 11.1 percent, is worse than they expected.

Three-quarters of those questioned are most worried about rising energy bills, more than half are worried about food and groceries, 41 percent are worried about petrol and diesel prices, and one in five (15 percent) are worried about rising mortgage costs and their rent.

A third (33 percent) of parents worry about their children and grandchildren’s ability to cope with higher costs, and a fifth (22 percent) have changed their wealth transfer plans as a result.

Mr Stevens added: “The problem with inflation is that price rises are permanent and are unlikely to be followed by periods of deflation.

“The reality is that costs will also be higher in the future, which means proper retirement planning is even more important.

Baroness Altman says you shouldn't sacrifice your retirement fund

Baroness Altman says you shouldn’t sacrifice your retirement fund (Image: Getty)

“Accessing retirement funds is probably one of the most important financial decisions you will make as an individual.

“The tax implications are more significant than buying a property, so people need to make sure they get it right.”

It is understandable that people need help with day-to-day expenses, but he urged people to think carefully and seek professional advice.

Retirees are also using the equity built up in their homes to make ends meet in record numbers.

The Equity Release Council said 13,500 over-55s took out new equity release schemes between July and September, the third year-on-year increase in new customer numbers.

But Aaron Strutt at mortgage broker Trinity Financial warned that interest rates charged on new lifetime mortgages had reached “eye-watering” levels.

As of October 2020, according to Defaqto, the average rate for an equity release loan was 4.01 percent, while the lowest rate available was 2.23 percent.

Nearly 13,500 over-55s have taken up new equity release plans

Nearly 13,500 over-55s have taken up new equity release plans (Image: Getty)

Right now, the lowest rates available are around 6.7 percent, while the highest are over 9 percent.

With an equity release lifetime mortgage, the interest on the loan is usually added to the amount borrowed, so the homeowner pays compound interest on the loan and the amount owed increases quickly.

Mr Strutt said: “To say lifetime mortgage costs have increased dramatically would be an understatement.”

Victoria Scholar, Head of Investments at Interactive Investor, said: “A study of our clients’ Self-Invested Personal Pension (SIPP) in the first half of the year shows a clear rise in the amount people are withdrawing as income from their pension.

“Younger workers are especially reducing their pension contributions, but this behavior varies a lot by age.

“Younger clients are more willing to reduce pension payments, while older people approaching retirement age are more concerned about keeping their pension pots on top.

“The so-called mass resignations during the pandemic meant that many people close to retirement age decided not to return to the workplace after Covid.

“This increased the number of pensioners in the economy, resulting in a large number of SIPP withdrawals during the period.

“However, this year’s pressures from rising inflation and falling markets have dampened that effect, and more people may turn to the workforce to generate additional income to offset their increased spending.”

*Retailers reported a “steady start” to Black Friday trading yesterday, amid fears that rising living costs could weigh on shoppers.

Barclaycard Payments has revealed that sales levels on Friday morning were more consistent than those recorded on Black Friday last year.

It comes after warnings that the shopping day could be disrupted due to pressure on consumer bills.

Electricals retailer Currys said lower home energy bills helped boost Black Friday sales of energy-efficient products like air fryers and heat-pump tumble dryers.

It has been revealed that 18,159 air fryers have been sold in the last one week alone.

Sales were also high in the week leading up to Black Friday, experts said.

Rocketing home energy bills helped boost Black Friday sales, Currys said

Rocketing home energy bills helped boost Black Friday sales, Currys said (Image: Getty)

Marc Pettican, head of Barclaycard Payments, said: “Our data shows that Black Friday is off to a steady start this year, despite the challenging economic backdrop.

“Looking at spending on the morning of Black Friday, so far today, transaction volumes are broadly in line with what we saw at this time last year.

“We’ve also seen an increase in transactions in the week to date, up 3.46 per cent week-on-week compared to last year’s Black Friday.

“In the run-up to the World Cup, this week’s England and Wales matches on Monday have provided a boost to retail and hospitality.”

The building society said it had seen the highest number of purchases as of 9am on Friday compared to the previous two years across the country.

Members made 1.37 million transactions, 7 percent more than last year’s Black Friday and 33 percent more than Black Friday 2020, which was hampered by pandemic restrictions.

Mark Nalter, director of payment strategy at Nationwide Building Society, said: “The early signs are that this Black Friday will be the busiest shopping day of the year.”

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