Cashing in small pension pots early to rely on state benefits in retirement could leave many thousands of people struggling to achieve an acceptable income in later life, according to analysis by Just Group.
The Joseph Rowntree Foundation's 2018 report suggests the minimum income standards for single pensioners is £195.90 a week with benefits such as state pension and winter fuel allowance providing 93 per cent or about £13.71 less than the minimum required.
For pensioner couples the minimum income standards is £301.92 a week, with benefits providing 90.3 per cent or about £29.29 less than required.
Stephen Lowe, group communications director at Just Group, said: "State pension and other benefits don't quite provide enough income for pensioners to achieve these minimum income levels so retirees will need to top-up using their own savings or pensions.
“The good news is that the sums needed are relatively modest, the bad news is that the financial regulator has described cashing in funds early 'the new norm' with tens of thousands taking small funds up front each month."
He said a 65-year-old would need a pension pot of about £14,000 to generate a guaranteed income of £13.71 a week, while around £30,000 could provide £29.29 a week, based on current rates available on Guaranteed Income for Life solutions.
He said the minimum income standard figures provide an important sense-check for anyone thinking of withdrawing pension funds.
Mr Lowe said: "It is important people don't make pension decisions they later regret and these minimum income standards figures are a good first target although most will aspire to higher incomes and living standards.
"That is why it is so important that people at least take the free and impartial guidance on offer and in many cases professional advice too.
"These are the best safeguards available and should be a normal step in the process of accessing pension money."
Figures from the Financial Conduct Authority show around 600,000 pensions are being accessed each year.
Seven in 10 savers accessing pension money for the first time are aged less than 64 and nearly two-thirds of funds accessed are valued at less than £30,000, with 85 per cent of funds worth less than £10,000 and 61 per cent of funds worth £10,000 to £30,000 being full cash withdrawals.
Three in 10 people do not have any occupational or workplace pension and will be relying on the state pension and other benefits for retirement, according to the FCA.
Martin Bamford, chartered financial planner and accredited later life adviser at Surrey-based Informed Choice, said: "It is too soon to tell what impact pension freedoms might have on pension incomes in the long-term.
"There will undoubtedly be some who cash in small pots and have to fall back on the state pension in later life.
"Encashing pension pots without guidance could end up badly, but we must never forget that people are absolutely entitled to do what they like with their own money."