Pensions are built for the long haul, to provide a decent income when you stop working. So accessing your pension early needs to be approached with care.

In recent years, there is international evidence that more people are considering dipping into their retirement savings early.

In the US, Vanguard found one in 20 pension savers took hardship withdrawals from their pensions last year, up 33% from the year before. And in the UK, it’s reported plans are underway to allow pension savers to access their money at any age.

And there can be good reasons to access a pension early.  Whether it’s to reduce debt, to take a break from work, or due to investment performance, the flexibility to access your pension can be useful.

But before you crack open that pension pot, it’s worth understanding the real costs of taking money out early.

Here’s what you need to know.

Accessing your pension early has a triple effect your wealth

Three effects conspire to reduce your wealth when you access your pension early.

First, you’ll pay less in.  It’s obvious when you say it, but more is more when it comes to pensions.  Stopping contributions early simply means less goes in.

Second, you’re missing out on future growth. The power of a pension lies in long-term, compounding growth. Your money grows faster the longer you leave it invested.

By withdrawing funds early, you’re not just reducing your current pot – you’re giving up on future returns those investments could have delivered.

For example, taking €50,000 out of your pension at age 55 rather than leaving it to grow until 65 at, say, 5% per year, means missing out on around €32,000 in potential growth. That could translate into a meaningful difference in your retirement income.

Third, opening your pension pot at an earlier age means the fund needs to last longer. Starting to draw it down early increases the risk of running out of money later in life, at a time you certainly won’t feel like rejoining the workforce.

The right way to draw your pension early

If you’re minded to open your pension pot early, here are three questions to consider.

1. Be clear on the reasons for drawing down your pension

There are plenty of good financial reasons to open your pension pot – but some risky ones too. If you’re considering accessing your pension simply because you can, consider the long-term effects with care, and be sure you’re accessing your pension early for the right reasons. The tax-free lump sum that looks tempting now could cost you a lot in terms of future wealth.

2. Consider which pension to draw down

Many of us have multiple pension pots these days – and it’s often possible to split old pensions into multiple pots too.

Sometimes, opening one of your smaller pension pots can be a smart move. Taking this approach, you could, say, access a small pension from an old job at age 50, using the tax-free lump sum to pay off your mortgage.

This can be a practical strategy if you’re looking to clear a remaining mortgage or pay down expensive debt. In this case, you’re essentially swapping future pension income for lower monthly outgoings today – which can improve your financial position in the near term, and reduce stress.

At the same time, you could maintain or increase payments into your main pension, with the aim of keeping this until age 65 or later.

The key is doing it as part of a broader financial plan, rather than a quick fix for a cash need.

3. Remember you’ll pay tax as you draw down your pension

When you draw your pension, you don’t get the whole amount in your hand tax-free.

When you retire (usually from age 60, but often possible from age 50), most people can take 25% of their pension pot as a lump sum.  Your lump sum is free of tax up to a maximum of €200,000 (and taxed at 20% thereafter).

The rest? That’s taxable income – and how you draw it down matters.

Taking it all out at once will likely push you into higher tax brackets and result in a hefty income tax bill. And once it’s out of the pension wrapper, that money is no longer growing tax-free.

So if you’re thinking of dipping in early, it’s worth looking at how much you actually get to keep – and how much it could cost your future self.

Accessing your pension early is a long-term decision

Your pension is one of the most valuable assets you’ll ever have. While there can be good reasons to dip in early – especially if it’s part of a debt-reduction or life-stage strategy – it’s vital to understand the long-term consequences.

Taking your pension early should be a considered decision, not a knee-jerk reaction. If you’re thinking about unlocking a portion of your pension, talk to Moneycube. We can help you weigh up your options, assess the long-term impact, and ensure you stay on track for a financially secure retirement.