SAVERS are being warned over a pension mistake that could cost them £30,000 or more in retirement - including giving up free cash.
Experts are urging savers to ensure they have enough money to afford to retire before dipping into their pension pots, as alarming new research shows nearly a third are withdrawing cash before retirement.
You can access your pension savings at 55 years old, but many people retire much later than this and the official retirement age - the age at which you can claim state pension - is currently 66.
But new research shows many people are taking money out their pension funds far before they retire, leaving them with less to get them through their golden years.
Research by pension firm Just Group found 28% of those over 55 said they had taken money from their pension before they retired, with a third of those saying they needed extra income to bridge the gap before state pension age.
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By doing so, they are effectively giving up free cash towards their retirement, too.
When you put money in a pension, it is invested on your behalf with the aim of growing the pot over time.
This means you earn extra money into your pension savings.
And the more you save, the bigger the return will be - so by taking cash out early, you're giving up those returns.
If you withdrew just £1,000 a year from your pension between ages 55 and 66, you would have already lost £11,000 from your pot.
But because of the returns you would get and the effects of compound interest (assuming 5% returns), you would actually have lost nearly £15,000, Just Group calculated.
If you increased your withdrawals to £2,000 a year, your pot would be £22,000 - but with returns and compound interest, you would actually have lost £29,834 in total - over £7,000 of which would have been free cash.
Experts have warned that a large number of savers already have far too little saved for retirement to live comfortably for the rest of their lives after they leave work.
Single pensioners need at least £14,400 a year to cover essential living costs in retirement, while couples need £22,240, according to the Pensions and Lifetime Savings Association (PLSA).
Meanwhile, those looking for a more comfortable retirement will need £31,300 a year, rising to £43,100 for a couple.
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Yet a typical pot size for someone between 55 and 64 is just £107,300, according to Office for National Statistics (ONS) data.
Stephen Lowe, group communications director at Just Group, said: “Our research shows about one-third of over-55s took pension money before giving up work - some because they wanted to and some because they needed to.
“It seems that accessing pensions before retiring from full-time work is helping significant numbers of people cope with rising day to day living costs and sudden or unexpected events such as redundancy or ill-health.
“Whether taking pension money before retiring is a good or bad decision depends on people’s individual circumstances, but it’s important to remember that pension money taken and spent before retirement will not be available to provide income later in life.”
What is compound interest and how does it work?
Compound interest is where your money earns interest or returns, growing the size of the pot - which then earns even more interest or higher returns.
This gradually snowballs over time, meaning the rewards for leaving your money alone can be huge.
We recently that revealed research by Interactive Investor found that if you put £50 into your pension each year, you would accrue £76,301 over 40 years, despite only spending £24,000 of your own money.
Craig Rickman, personal finance expert, at Interactive Investor, said that due to the "attractive tax advantages" on offer, the most common way of getting money away for old age is to use a pension - but not everyone is making the most of this.
"Saving enough for a financially comfortable retirement isn’t an easy task," he said.
"Perhaps the trickiest part is striking the right balance between living for today and funding tomorrow.
"None of us want to reach later life feeling like we didn’t make the most of our younger years - but we also don't want to end up with insufficient savings to retire on our own terms."
Before taking money out your pension when you're still working, it's worth checking if you'll have enough to retire on first.
If you take some cash out early, you may have to alter your retirement plans or work a bit longer.
How else can I get more money for retirement?
If your pension savings seem a bit short, it may be worth checking if you have any pots that you've forgotten about.
Millions of workers are estimated to have lost pension pots, with around one in 10 workers losing a pot worth £10,000, according to research by PensionBee.
We recently revealed how one saver found a whopping £100,000 from old factory job pensions he had forgotten about and now he's planning to travel the world.
There are several other services available to help you track them down, including the government's online Pension Tracing Service (or call 0800 731 0193).
Pension firm AJ Bell also has a service to locate old pension pots.
You can also try ringing your old employers' HR department to ask for the details of your old pensions.
Provide information like the dates you were employed, as well as your National Insurance number.
If you have a spare room in your home or like selling goods, you could earn some extra tax-free cash.
Those who rent out a room in their home, such as through Airbnb, can earn up to £7,500 a year without paying tax.
There's also a "trading allowance" of £1,000 for those who have a side hustle like selling goods on sites like Vinted or Depop.
The Government's free Pension Wise service can help you if you're not sure how to prepare for retirement.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.
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