Cash lump sum at 55 and over
Can I cash in my pension to pay off debt?
If you are aged 55+ and have a personal or company pension you are not currently paying into or receiving, you can cash in 100% of your pension as a lump sum. 25% would be tax free and the balance is taxed at your marginal rate.
Using your pension to pay off debt
How to clear your debts using cash released from your pension.
The Pension Freedom rules introduced in 2015 allows people to access their pension funds early and use the cash to pay off debts, especially if the cost of servicing the debts is spirally out of control. There are many reasons why people find themselves in debt, such as ill health, redundancy, bankruptcy or even divorce.
You can use your pension to pay off ANY debts if:
- You are age 55+.
- You have a Personal Pension or Company Pension you are no longer paying into or taking.
- You can be employed and continue to work.
Type of Pensions you can cash in to clear your debts:
- Defined Contribution Pensions – Company, Personal, Stakeholder and Group Personal Pension.
- Defined Benefit Pensions – Private Sector and Funded Public Sector Final Salary Pensions.
- Funded Local Government Pension Schemes (LGPS).
Does not apply to the State Old Age Pension
What are your options?
There are several options available to you:
1. You can take a 100% cash lump sum – the first 25% is tax free. The rest is taxed at your marginal tax rate applicable at the time you take it, which could change in the future.
2. Transfer your fund to a UK approved pension contract that gives you control over your money. You can then access your money when you need it, similar to using a bank savings account.
3. Leave the rest invested in a trusted scheme to provide cash for another time.
4. Transfer your pension to a scheme that will allow you to pass 100% of your fund to your beneficiaries in the event of your death. Death Benefits are paid free of tax if you die before 75; death after 75 is taxed at the beneficiary’s marginal rate
Case study: Paying off debts with your pension cash
When Tom first looked into releasing some money from his pension, he was bankrupt, having had his catering business fail due to circumstances out of his control, and still left with an outstanding loan that hadn’t been covered in the bankruptcy. Between his wife and himself, Tom calculated that the couple’s total debts amounted to £9,400. Their wish was to pay off the debts then acquire more funds to put towards an emergency fund.
Tom initially looked into pension release as he thought that the three personal pension plans were too insignificant to provide a sufficient income in retirement, so he figured he could “cash up” and use the funds to assist in getting the couple’s life back on track. Tom considered the sacrifice of the pension funds to be a small inconvenience compared to the stress that the couple were going through at the time as they were unable to live within their means.
Grove Pension Solution’s advice in this situation was to transfer his three pensions into one plan, and as a result, a total cash amount of £13,365 was released. As income was not required, the remaining balance of the pension fund would be left invested to a later date.
The released funds provided Tom with enough money to clear the £9,400 debts he and his wife had accrued and still have money left over for their planned emergency fund.
Had Tom’s circumstances been a little different pension release may not have been suitable. For example, had he not been a bankrupt he may have been able to restructure his debts into one larger amount over a longer period, this would have achieved reducing the monthly cost of his debts, which in turn meant he could live within his means and therefore not require to unlock his pension. Or had his pensions been a company pension scheme the loss of what he would have otherwise got at retirement might have been too much to justify taking some cash out of his pension early.
Need advice on using your pension to pay off debts?
Grove Pension Solutions Ltd is regulated by the Financial Conduct Authority.
We were established in 2007 so have many years of experience successfully helping 1000’s of individuals. Some of them we advised to transfer their pensions and some of them we advised to leave their pensions where they are and not transfer them.
Get Started Today
Free Pension Transfer Guide & Initial Consultation
Complete the form below to receive your Free Pension Transfer Guide.
If you would like to find out if transferring or cashing in your pension is suitable for you, we can provide a free initial consultation known as abridged advice.
Simply return the enquiry form included in the guide and post it back in the free post envelope provided.
As part of the consultation we will look at:
- What existing pension plans you have in place.
- Whether you have the right type of pension to transfer.
- What your plans are for retirement.
- How much cash you can release.
- Whether your existing pension remains the best fit for you.
- The likely cost of more in-depth advice.
"*" indicates required fields
Defined Benefit Pension Transfer Warning
Transferring away from a defined benefit pension scheme means you will lose valuable guarantees.
Taking benefits early will almost certainly reduce your pension income in retirement and is only suitable for a limited number of people and circumstances. This should not be seen as an easy option for raising cash.
If you release all your money from your pension early you will not have anything left to provide you with income in retirement.
When releasing cash from your pension, usually up to 25% is tax free, the balance is taxed at your marginal rate at the time and could change in the future.
Watch the FCA video explaining the expectations of financial advisers when advising you on defined benefit pension transfers.
Grove Pension Solutions Ltd is authorised and regulated by the Financial Conduct Authority (Reference number 465051).
Pension Wise Service
Following the introduction of the new Pensions Freedoms from 6th April 2015 the government has introduced a free and impartial service to help people understand what their choices are and how they work. Tel: 0800 1383 944.
Website: Pension Wise
State Pension Forecast
You can find out what state pension you are likely to be entitled to by clicking on the link below, which takes you to the government website where you can put in your details to obtain your forecast (often called a BR19). Tel: 0345 3000 168.
Website: State Pension Forecast
The Pension Tracing Service
The Pension Tracing Service can help you track down an old company or private pension plan and has a database of over 200,000 occupational and personal pension schemes. Tel: 0345 6002 537.
Website: The Pension Tracing Service
The Financial Conduct Authority
Financial Ombudsman Service
When a financial services complaint cannot be settled you may refer it to the Financial Ombudsman Service. Tel: 0800 0234567.
Website: Financial Ombudsman Service
If you are having money troubles, need advice about debts or want general information on pensions then the following organisations may be helpful:
Citizens Advice Bureau
National Debt Line
The Money Advice Service
Workplace and Personal Pensions
The government’s website with links to various pages about different types of pension