Advice you can trust
Can I pay off my credit card debt with my pension?
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.
Pay off your credit card debt with money from 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 your 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?
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.
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.
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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.
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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).
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