New pension regulations introduced in 2015 completely changed the way you can access your pension, and opened up what was previously a limited range of options. Some people choose to pay off debt with their pension, but is this wise when there are other ways that could help?
Apart from the fact that most pension schemes don’t allow you to take your pension if you’re under 55 anyway, there are formal insolvency procedures such as IVAs or even bankruptcy (known as Trust Deeds and sequestration in Scotland) that might be applicable, and preferable to using up retirement funds.
So what are the main considerations if you are thinking of getting rid of debt with your pension money, and how will they impact on other aspects of your life?
You’re allowed to withdraw 25% of your pension as a lump sum without paying tax. Withdrawing more than this percentage could mean you enter a higher rate tax band, and significantly increase your tax liability for that year.
Withdrawing pension monies could affect your ability to claim means-tested benefits, and even rule out a claim in some instances. You would need to let the Department for Work and Pensions (DWP) know of your plans, as well as the local council.
You may have to pay additional charges to access your pension before retirement, and there is usually a charge each time you withdraw money. These fees can considerably reduce the total money available to reduce your debts.
It’s easy to ignore the fact that you could run out of money in retirement, especially when you’re still working, but this is a huge practical issue that has increased because of the current longer life expectancy. This may not be a problem if you have several pensions, or a large pot of savings for example, but if not you need to consider the ever-increasing costs of living.
If you’re below retirement age and withdraw more than £30,000 from your pension to pay off debt (or for any other reason), you might assume that you’ll be able to replace the money before you retire.
The Pension Recycling rules mean that if you receive £7,500 or more tax free, and then make extra contributions of more than 30%, HMRC could charge up to 70% on your tax free sums.
Raiding your pension might seem like the perfect solution to paying off debt, particularly if you’re below retirement age, but using these funds now could have serious adverse effects on your quality of life in later years.
If you have high-level personal debts and are considering drawing on your pension to help clear them, you should seek expert advice before proceeding. If you’re based in Scotland, you can contact Scotland Debt Solutions for advice. With five offices located across the country, we are well placed to help you get your finances back on track.
The Register of Insolvencies is a public register that documents Trust Deeds until five years after the discharge date and includes personal details.
Joint Trust Deeds don’t exist, however, if you want to run a Trust Deed that encompasses debts as a couple, this will be two individual Trust Deeds.
Our Scottish based team can help advise you on your debt problems.