MoneyWeek article: Half of retirees are fully raiding their pension pot at retirement - what are the risks

Pensions can often suffer from a bad reputation so it's natural for people to sometimes want to get their hands on the money as soon as it's available to them.

There are often misconceptions around what'll happen to the money if it's left in the pension. This leads to people wanting to draw the pension out and stick it in the bank. So, they've effectively gone from something that was tax efficiently growing over the years to cash that'll sit in their bank account, earning very little and possibly being taxed.

A big part of what we do is help people understand how they can use the money in their pension to support their retirement. Everybody's different and their individual circumstances will dictate how and when money is drawnto fit within their overall financial plans.

Pensions are so varied in terms of the features, costs, investment options, ways in which money can be withdrawan and death benefits that getting professional advice is often a great investment,

The report highlights a broader concern: that many retirees are making complex, irreversible financial decisions without adequate guidance.. A 2022 Social Market Foundation found that over two-thirds of 50 to 64-year-olds are unaware of how much they need for retirement and are, on average, £250,000 short of their expected retirement income. The risks of fully encashing one’s pension pot are substantial. While the appeal of immediate liquidity is understandable—particularly in the face of rising living costs or financial uncertainty—doing so can result in unintended tax liabilities, premature depletion of retirement savings. More critically, it reflects a behavioural shift where pensions are being treated less as vehicles for secure lifetime income and more as flexible savings accounts to dip in and out of, often to support discretionary or non-essential spending. This deviates from the core purpose of a pension, which is to replace earned income in later life when employment ceases.

The PPI reports 450,000 pension pots accessed with 51% fully withdrawn and only 10% opting for annuities, clearly showing pension freedoms favour cash over income. The biggest risk is that fully cashing out risks outliving funds leading to retirement poverty. £10,000 at 55 gives £333/year vs. £12,570 needed according to the PLSA. With inflation expected to spike up to 3.7%; the tax take (£4,500 on £22,500) will hit hard, plus the lost potential growth (£30,000 to £48,595 in 10 years at 5%). A more secure option for the long term could be to take the 25% tax-free element, drawdown 4% yearly (£900), and buy a small annuity (£200/month from £4,500). Above all, have an annual review.

I think the figures might be misleading because in my experience most clients are underspending.

However, some people might be deliberately exhausting smaller pension pots in the early years of retirement, safe in the knowledge that they may have the state pension and other pots or final salary schemes to fall back on.