Taking money from your pension before you fully retire could cost thousands of pounds

22nd June 2015

The new pension rules which came into force in April 2015, allow those with a Defined Contribution (DC) scheme, age 55 or over, to fully access their pension.

However, WEALTH at work say a growing number of people could lose out on future pension contributions from their employer if they take money from their pension but wish to carry on working. This is because many employers will insist that the whole pension pot is transferred to a third party in order for you to access your cash. The result of this may be that any future earnings have a much lower employer contribution to pension than has been received to date.

Therefore, WEALTH at work are warning that in some cases, accessing your pension early could cost thousands of pounds.

Example one

John is age 55 and earns £40,000 and wants to take £10,000 from his DC company pension to help pay for his daughter’s wedding.  At the moment his company pays a generous 10% in contributions to his pension.

However, his employer says he must transfer out to access the cash, and will not be entitled to return to the scheme but can join the auto enrolment scheme which in this example it only pays the minimum contributions which today is 1%, set to rise to 2% in 2017 and 3% in 2018. If he decides to retire at age 65, he would miss out on approximately £30,000 in missed contributions, making it a very costly short term method of generating income.

Example two

Mary is age 55 and earns £50,000. She wants to take £10,000 from her DC company pension to pay for a once in a lifetime trip to take her family to visit other family in Australia.  Her company pays a generous 15% contribution to her pension. Her company will continue to contribute, but according to the scheme rules, this falls to 5% if an employee makes a withdrawal.

If she retires at age 65, she would miss out on £5,000 a year, so £50,000 (15%-5% = 10% missed contribution x £50,000 salary = £5,000 x 10 years = £50,000) in missed contributions overall, making it also a very costly short term method of generating income.

Both examples consider only the contribution levels and not the potential loss of investment return on those contributions which could also be considerable over the 10 years.

Jonathan Watts-Lay, Director, WEALTH at work – leading providers of financial education, guidance and advice in the workplace comments, “We speak to many leading employers, and they are genuinely concerned that if their employees start taking money out of their pension before they fully retire, they won’t have enough money to live on in their actual retirement. This is why employers may choose to withdraw their generous pension contributions and benefits, in the hope this will deter employees from accessing their pension early.”

He adds, “This is why employees should receive financial education, supported by regulated advice in order to understand their options and the consequences of their actions.”

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