Pensioners raid retirement funds to support cash-strapped families

Experts yesterday urged caution among those seeking to access their pension cash early to avoid the threat of a savings shortfall later in retirement. The latest research reveals almost a quarter of people (24 percent) have already accessed or are planning to use retirement funds to help deal with rising living costs today.

One in seven (14 percent) has accessed retirement funds for themselves and one in 12 (8 percent) parents say they have done so to support their children, the data gathered by financial services company Killik & Co showed.

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

“As a result, many families are making tough financial choices, including using long-term savings to make up for shortfalls in their own budgets and those of their children.

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

Pensions expert and former minister Sir Steve Webb agreed there was “hard evidence” that people were dipping into their pension pots to make ends meet in increasing numbers.

Sir Steve, now a partner at financial consultants LCP (note please keep LCP reference in), said: “The latest figures from HMRC clearly show that the number of people making withdrawals from pensions was up about a quarter to 500,000 in the three months to June 2022 compared to a year earlier.

“The amount withdrawn was £3.6 billion versus £2.9 billion a year earlier.

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

“The biggest thing to be aware of when considering pension withdrawals is that most people live longer than they expect they will.

“For example, I’m 57 years old and at my age I might expect to live until my mid to late-80s let’s say.

“For somebody who has only got a modest pension to begin with, if they then start reducing it, it just means that later life is going to be potentially more difficult.

“For example, you might have to focus on paying bills to the point that there won’t be much traveling to see the grandchildren or having that holiday you dreamed of.

“Early withdrawals could make the difference for many people between a comfortable retirement and a strained one, where you don’t have the choices you might like to have at that point in life.”

And former pensions minister Baroness Altmann warned: “Please think really carefully before giving up on pensions.

“This may be the best or only option for some, but you could live to regret. Unless you are in very poor health and have exhausted all other reasonable ways to pay your bills, sacrificing your retirement security is normally a bad idea.”

The report found two-fifths (40 percent) of people think the cost-of-living crisis fuelled by inflation at 11.1 percent has been worse than they expected explaining why they have had to dip into money set aside for the future.

Three-quarters of those questioned were most concerned about rising energy bills, more than half were worried about food and groceries, 41 percent were concerned about the cost of petrol and diesel while one in five were experiencing soaring mortgage costs and one in seven (15 percent) were concerned about their rent being increased.

The research found a third (33 percent) of parents are concerned about the ability of their children and grandchildren to cope with higher costs, and more than a fifth (22 percent) have changed plans to transfer wealth as a result.

Mr Stevens added: “The problem with inflation is that price rises tend to be permanent, they are unlikely to be followed by a period of deflation to bring them down again.

“The reality is costs are also going to be higher in the future and that means that having the right provision for retirement is even more important.

“Accessing a pension fund is likely to be one of the most important financial decisions you ever make as an individual.

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

He added that it was understandable people needed help with day-to-day costs but urged people to think carefully and to seek professional advice.

Pensioners are also cashing in on the equity built up in their homes to make ends meet in record numbers.

Almost 13,500 over-55s took out new equity release plans between July and September with new customer numbers increasing by a third year on year, the trade body the Equity Release Council reported.

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

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

Now, the lowest rates available are around 6.7 percent, while the highest are above 9 percent.

With an equity release lifetime mortgage, the interest owed on the loan is usually added to the sum borrowed, so the householder ends up paying compound interest on the debt and the amount owed can quickly mount up.

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

Interactive Investor’s Head of Investment Victoria Scholar said: “Research into our customers’ self-invested personal pensions (SIPP) in the first half of the year suggests there has been a clear rise in the amounts that people are withdrawing from their pensions as income.

“Younger workers especially are reducing their pension contributions to slim down their outgoings but this behaviour varies a lot depending on age.

“Younger customers are more willing to cut back on pension payments while older people who are closer to retirement age are more conscious of keeping their pension pots topped up..

“The so-called Great Resignation during the pandemic meant that many people near retirement age decided not to return to the workforce after Covid.

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

“However with pressures from rising inflation and falling markets this year, that effect has eased off with more people possibly heading back to the workforce to attain additional income to cover their increased costs.”

*Retailers reported a “steady start” to Black Friday trading yesterday amid fears the rising cost-of-living could weigh on shoppers.

Barclaycard Payments has revealed that sales volumes on Friday morning have been consistent with what was recorded on Black Friday last year.

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

Electricals retailer Currys said that rocketing household energy bills has helped to boost Black Friday sales of energy efficient products such as air fryers and heat-pump tumble dryers.

It revealed that 18,159 air fryers have been sold over the past week alone.

Experts said sales have also been higher in the week leading up to Black Friday.

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.

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

“We have also seen an increase in transactions in the week leading up to today, with volumes up 3.46 percent week-on-week compared to the lead-up to Black Friday last year.

“It’s likely the feel-good factor in the run-up to the World Cup, with the England and Wales matches on Monday of this week, has given retail and hospitality a boost.”

Building society Nationwide said it saw higher purchase numbers as of 9am on Friday compared with the last two years.

It said members have made 1.37 million transactions, which it said is 7 percent higher than Black Friday last year and 33 percent higher than Black Friday in 2020, which was hampered by pandemic restrictions.

Mark Nalder, director of the payment strategy at Nationwide Building Society said: “Early indications are that this Black Friday will be the busiest shopping day of the year.”