Can I cash in my
pension to pay off
Using your 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 – up to 25% Tax Free*
How to clear your debts using cash released from your pension.
The Pension Freedom Rules introduced in 2015 now 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 not 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 Schemes – Private Sector and Funded Public Sector Final Salary Pensions
- 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:
- 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.
- 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.
- Leave the rest invested in a trusted scheme to provide cash for another time
- 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.
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.
Case Study: Paying off debts with your pension
As part of our Pension Release guide, here we take a look at an example of how funds acquired through pension release can be used to clear existing debts and plan for those unforeseeable emergencies that can and do crop up.
When Tom first looked into pension unlocking, 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 required to unlock his pension. Or had his pensions been company pension schemes the loss of what he would have otherwise got at retirement might have been too much to justify pension unlocking.
This is why it is so important to seek professional advice from a company like Grove Pension Solutions. We can make sure all your circumstances are looked at individually and any recommendation is suitable for you and your specific situation.
Need advice on how to access your pension to pay off debt?
It’s free to find out your options
Grove Pension Solutions Ltd is regulated by the Financial Conduct Authority.
We are financial advisers specialising in helping people transfer or cash in their pensions early and have been doing this for many years now, long before the Pension Freedom changes came into effect.
We have provided professional advice to thousands of people over the years.
Our service allows you to evaluate your Pension Freedom options without paying a penny. It’s only if you decide to go ahead with releasing all or part of your pension pot that you pay a fee. You are under no obligation to go ahead if you don’t want to.
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