Taking money out of pension pots early has become the “new norm” for Britons but action may be needed to help protect some from losing out, the City watchdog has said.
A study by the Financial Conduct Authority (FCA) said 72% of retirement funds that had been accessed were by consumers under 65.
It said a quarter who take out the full amount are splashing out on new cars, home repairs or other purchases.
Most were choosing to take lump sums rather than a regular income, it found, and they were increasingly doing so without taking advice.
The watchdog has been looking into how the retirement landscape has changed since the launch of pension freedoms in 2015.
These were designed to give over-55s more choice about how they use their pension pot, rather than simply requiring them to buy an annuity, or fixed income for life.
The FCA said drawing down the money had become increasingly popular, with twice as many pension pots moving into drawdown funds – which give flexibility about how much can be taken out – as annuities.
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Most of those drawing down their entire pensions savings were those with relatively small pots below £30,000, the study found. Most also had other sources of retirement income.
The FCA also said people who withdrew their funds did so partly because they did not trust pensions, with the majority moving them into other savings or investments.
“This can result in consumers paying too much tax, missing out on investment growth or losing out on other benefits,” said the watchdog.
Of those fully withdrawing savings, 14% spent the largest share to pay off mortgage or other debt. 25% used it for home repairs, a car or other purchases, while 32% saved most of it and 20% invested in property, a business, or in bonds or stocks.
The FCA also raised concerns about consumers not shopping around.
Meanwhile, drawdowns were increasingly being made without taking advice.
Before the freedoms were introduced in 2015, only 5% of funds being drawn down were without advice, compared to 30% now.
“Drawdown is complex and these consumers may need more support and protection,” the FCA said.
Christopher Woolard, executive director of strategy and competition at the watchdog, said: “Since the introduction of pension freedoms, the retirement market has changed substantially.
“We have identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future.”