Two in five DC savers plan full tax-free cash withdrawal

Over two fifths (42 per cent) of 55–70 year olds with a defined contribution (DC) pension said they planned to withdraw, or had already withdrawn, their full 25 per cent tax-free lump sum, according to research from the Standard Life Centre for the Future of Retirement.

Among those planning to take the lump sum in one go, 44 per cent said it would represent the start of their retirement journey, while a third (32 per cent) said it would give them a sense of financial security, and a fifth (21 per cent) said they saw it as a separate pot of money from the rest of their pension.

Standard Life Centre for the Future of Retirement, director, Catherine Foot, explained: “The tax-free lump sum is frequently viewed as a reward after many years of saving.

"The psychology at play is interesting, and people typically think of this money as a distinct pot, not necessarily treating it as retirement income.

"While retirement income decision-making is regularly associated with feelings of uncertainty, when it comes to tax-free cash, many people have a clear plan in mind for the money.”

Meanwhile, more than a quarter (28 per cent) of respondents said they would use their tax-free lump sum for a major purchase, and the same share intended to use it for day-to-day income.

A further 22 per cent said they planned to reinvest it, while only 9 per cent said they had no specific use in mind.

The think tank has called for better guidance so people can weigh up immediate goals against longer-term financial security.

“The decision to take a lump sum in full may be right for many, with many using it to secure a regular income, but it also carries the risk of depleting a pension pot too early if not carefully managed,” commented Foot.

“The findings highlight the need for clearer, well-timed and more accessible support to help people understand how and when to use tax-free cash, the trade-offs involved in taking it in full or in stages, and how to balance short-term peace of mind with long-term regular income security.”

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