Savers Warned Against Withdrawing Pension Funds Ahead of Spring Statement
As the Spring Statement approaches, savers are being cautioned against the temptation to withdraw cash from their pension pots. Recent analyses indicate that such withdrawals could result in substantial financial losses. According to research from pensions consultancy LCP, individuals who cashed out their pensions during the market downturn in 2022, triggered by Liz Truss’s controversial mini-Budget, missed out on potential recoveries amounting to approximately £7,000, significantly impacting their retirement savings.
This advisory comes as Rachel Reeves is set to present her Spring Statement on March 26, raising concerns that the uncertainty surrounding upcoming fiscal policies may lead savers to repeat the costly mistakes of the past.
Reasons Behind the Warning for Pension Withdrawals
The turmoil in the markets following Liz Truss’s mini-Budget announcement in September 2022 caused widespread panic among savers. The proposed unfunded tax cuts and a notable rise in government borrowing spurred a significant sell-off in government bonds, leading to a remarkable drop in the values of defined contribution (DC) pensions. LCP’s analysis revealed that by September 2022, a hypothetical £100,000 pension pot had plummeted by nearly 20%, reducing its value to just under £80,000.
This sharp decline prompted many savers to “cut their losses” by cashing out their pensions, fearing further market instability would further erode their savings. However, LCP’s findings indicate that those who refrained from making impulsive decisions witnessed a considerable recovery in their savings. By January 2025, the same £100,000 pot would have appreciated to £87,322, marking an increase of £7,200 from its lowest point. Many savers found themselves in a similar predicament ahead of Reeves’s first Budget last October.
Potential Losses from Premature Withdrawals
The issue with withdrawing pension investments at inopportune times is that it crystallizes, or effectively locks in, losses. In the wake of the 2022 market downturn, those who withdrew their money at the lowest point effectively cemented a 20% loss. In contrast, those who maintained their investments experienced a recovery over the subsequent two years.
According to Webb, “In the tumultuous markets of 2022, particularly following the Truss mini-Budget, pension values suffered. However, those who opted to cash out immediately missed out on the subsequent recovery in fund values, potentially costing them thousands of pounds.” While predicting the future remains uncertain, he advises against making life-altering decisions based solely on short-term market fluctuations.
Moreover, if an individual had opted to cash out their pension in July 2022, just before the worst of the market turmoil, they would have realized more money than those who stayed invested during the volatility—£88,959 versus £87,323. However, they would also face additional tax liabilities, as withdrawing a large sum in one go could push them into a higher tax bracket. Gradual withdrawals would allow for more tax-efficient management.
Guidance for Those Concerned About Their Pension Value
The Chancellor has indicated that she intends to limit major fiscal events to one per year, suggesting no sweeping policy changes are anticipated in the forthcoming statement. Yet, with economic growth failing to meet expectations, experts warn there may be pressure to revise her fiscal rules or implement new tax increases, despite her assurances otherwise.
Jason Hollands, managing director of Evelyn Partners, emphasizes that making hasty changes to pensions and investments during turbulent market periods can be fraught with risk. “It can be akin to attempting to change an aircraft engine mid-flight,” he explains. Even seasoned professional investors can misjudge timing, making it advisable for most private investors to focus on long-term goals instead. “During market upheavals, the best course of action is often to remain steady and avoid hasty decisions.”
Many workplace pension schemes automatically shift investments from stocks to bonds as individuals near retirement, intended to mitigate risk. However, this strategy presupposes that individuals will purchase an annuity—providing a guaranteed income for life—upon retirement. Increasingly, many opt to keep their pensions invested, withdrawing funds as needed through income drawdown. Hollands adds, “If you choose to remain invested, it may necessitate a continuing high allocation to equities to ensure the pension remains viable for potentially another 20 years or more. Shifting too quickly from equities to bonds could result in a pension that is insufficient for future needs.”
Tom Selby, director of public policy at AJ Bell, underscores the importance of ensuring pension funds align with financial plans as retirement approaches. Many pension schemes employ “lifestyle” strategies that automatically transition savers into bonds, assuming an annuity purchase. However, this approach can expose individuals to volatility in bond prices without the protective benefits of an annuity.
For those caught in this predicament during the 2022 market turbulence, options were limited. They could either hope for a recovery in bond prices, purchase an annuity despite earlier intentions, or realign their investments—often locking in losses. Selby cautions, “Bonds are not always a safe haven. If your investment strategy is misaligned with your retirement plans, adjusting it may be the most prudent course of action. Otherwise, you risk remaining stuck with an unbalanced strategy and excessive exposure to bond price fluctuations.”
