Paying off debt has been cited as the main reason for taking tax-free cash from a pension, a survey has found.
Research by Portafina of more than 2,500 of its customers found more than a third of those seeking advice on taking tax-free cash were doing so to tackle ongoing debt.
A further 21 per cent suggested the funds were for home improvement and 11 per cent needed it to pay for a new vehicle or to cover maintenance on their current car, van or motorbike.
The average age at which the advice firm’s customers took advice around tax-free cash in 2018 was 56 years and seven months, with more than half of those surveyed taking most of their money before they turned 56.
Before a tax-free cash transfer, average pot sizes were £89,974, while median pots were £56,923. The average tax-free amounts, therefore, were £18,110, or £12,171 for a median pot.
Jamie Smith-Thompson, managing director at Portafina Investment Management, said: "There is obviously good financial sense for most people in leaving their pension pots invested in growing assets tax-free for as long as possible.
"However, it’s also clear from our dealings with pension freedoms clients that the majority who seek advice around taking some tax-free cash from age 55 have very good reasons for wanting to do so.
"Tackling a debt once and for all, especially one attracting a high interest rate, can also make good financial sense, as well as reducing anxiety and their monthly outgoings.
"Likewise, investing in their property, which is often their main asset as well as their home, to keep it fit for purpose as they head towards their retirement can avoid further deterioration and far larger bills down the road. These people aren’t being reckless, they are looking to their tax-free cash for sensible reasons."
He added: "Anyone thinking of taking their tax-free cash just to put it into their bank or building society savings account should think carefully about what they are giving up, and what it could cost them in the long term.
"In many cases people simply don’t understand their pension whereas they are confident they understand their bank account.
"Much more needs to be done to engage people with their pensions and make them easier to understand – especially when more and more self-service is being encouraged with very few safeguards."
