Using pension release to tackle debt

You do not have to wait until you retire to access your pension. Pension release is an option from the age of 55, where you can take up to 25% tax-free, and as a result of the new pension rules you can now withdraw your entire pot.

There were fears that the flexibility of these new rules would encourage a reckless approach and that people would use their pensions to splash out on luxury cars and holidays; however, this hasn’t been the case. In fact, the number one reason why people release their pension is to tackle debt.

Millions of people hope to retire debt-free, but 30% of retirees still have outstanding debt including mortgages when they reach retirement. The average amount owed is £34,600, although one in ten have debts of £100,000 or more. Debt management is particularly challenging if you cannot afford to make sufficient monthly repayments to reduce the capital, as the interest continues to mount up and it becomes increasingly difficult to overcome.

If you have debt you may wish to consider seeking debt counselling or loan restructuring advice.

For some, it may make financial sense to use pension release to tackle high-interest debt. With the current low interest rates, people often pay more on their debt than they earn through their savings, which makes little financial sense. The longer you have debt the more interest you will have to pay back, so the earlier you tackle it the better off you’ll be.

The benefits of using pension release to tackle debt

You could free up the money you are making on monthly debt repayments and, if you choose to, put this spare cash back into your pension. Over time you might be able to recoup the amount that you withdrew to tackle debt. Other benefits include:

  • Up to 25% of your pension can be withdrawn tax-free
  • You could reduce the amount of interest you would have had to pay on the loan
  • You might be able to retire debt-free 
  • Your assets may not be needed to clear debt after you’re gone and your beneficiaries will receive more of your estate. 

The potential drawbacks

Pension release is not suitable for everyone. As withdrawing money before you reach retirement can reduce the amount of income you will have in later life, it is important to seek regulated financial advice to find out if this option is appropriate for you.

In some circumstances you may need to transfer away from your current pension provider to access your money, which could mean losing pension benefits such as a guaranteed annuity rate or additional death benefits. A pension transfer may also incur exit fees.

Only up to 25% of your fund is tax-free, the remainder is considered taxable income and so you may have to pay income tax on the additional money you withdraw. This could push you into a higher income tax bracket and you could be faced with a large bill to pay.  

If you take money from your pension to tackle debt you may be swapping a current debt problem for a future retirement income problem, so it is important that you explore all other methods of debt management before making a decision.

Have you used pension release to tackle debt? Share your experience in the comments below.

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Important information

Tax treatment depends on your individual circumstances and is subject to change.

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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