Can I Pay off my credit card debt with my pension?
Advice you can trust
Use your pension to pay off credit card 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 – up to 25% Tax Free.
Pay off your credit card debt with your pension Fund
As part of our Pension Release case studies we take a look at how you can pay off your credit card debts using your pension fund.
If, like many people, you are building up credit card debts, then the good news is that you may be able to pay them off by releasing money from your pension early.
You can ONLY do this if you are age 55+ with a personal or company pension you are not paying into or receiving. You can continue to work after releasing cash from your pension.
Case Study: Paying off Credit card debt with Pension
Here is an example of how you could be £9,300 better off by using your pension to pay off your credit cards debts.
- Steve from Birmingham is aged 56 and has credit card debts of £12,500.
- He pays this off at £232 per month. At this level it will take 10 years to pay off.
- It would take 10 years to clear and he would pay back a total of £28,072.
Here’s how he could use his pension to be better off, assuming a pension pot worth £50,000.
- Release a 25% tax free cash lump sum from his pension, this gives Steve the £12,500 to pay off all his credit card debts, making him debt free and with £232 extra each month in his pocket.
- Steve then pays the same £232 into his pension over the next 10 years. The government will increase this by a further £46.40 every month.
- Steve can continue to work after releasing cash from his pension.
The pension value after 10 years if Steve hadn’t used his pension to pay off his debts: £57,600
The pension value after 10 years if Steve releases £12,500 tax free cash now and pays £232 per month into his pension: £66,900
Steve is better off by £9,300 instead of paying credit card interest.
This is a very simple scenario to show how it works, everyone’s circumstances are different.
Interest rate on credit card = 18.9% APR (Barclaycard typical advertised rate Maintain Credit Card source: thisismoney.co.uk December 2018)
Pension fund remains invested for 10 years and grows by 5% a year adjusted for inflation illustration provided by Royal London and AXA. The growth rate could be more or less than this.
Basic rate tax relief applied to the pension contribution, which could change in the future.
Once tax free cash has been taken, the remaining fund, when released, will be taxed at your marginal rate depending on your circumstances at the time and could change in the future.
Is Pension Release suitable for you?
Pension Freedom gives you greater flexibility in accessing your pensions funds early, which can be used to pay off your credit card debts or any other debt.
It is vital that you take professional advice and understand the implication to your tax position, your death benefits and future retirement income when cashing in a pension to pay off credit card debts.
This service only applies to pensions in the UK. 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. Usually 25% of your pension can be released tax-free, the balance is taxed at your marginal rate at the time of release, this marginal tax rate could change in the future.
Need advice on USING your pension to pay off CRedit card 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.