More people than ever are retiring with significant amounts of debt. One in three people planning to retire now expects to have debts – an average of over £17,000.
And annuity rates have been low for a long while, although they should be starting to rise as interest rates edge up in 2022. So with more debt to pay and their likely pension income getting less, it’s not surprising that many people are thinking of taking money from their pension rather than take it as an annuity giving a monthly income. This has been possible since 2015 if yopu are over 55. From 2028 this age will increase to 57.
This could give you a new way to repay your mortgage or other debts. But is it a good idea?
There are possible tax and benefits problems involved, the charges could be bigger than you expect. And there is the big issue that your pension is meant to fund a comfortable retirement!
Who can now take money from their pension?
Most people with a personal pension (sometimes called a “money purchase pension” or a “defined contribution scheme”) can now withdraw some or all of it all in cash when you get to 55 or over. Even if you are still working.
Who can’t?
- the under 55’s. Don’t believe anyone who says you can get money from a pension if you are under 55 – they are either mistaken or this is a scam;
- people who are already getting a pension from an annuity – you can’t change it and take cash instead;
- people in a final salary scheme can only take money out if they first transfer it into a personal pension and then access it. This may be VERY poor value for money. And you are taking on a lot of risk. If the transfer value is more than £30,000 you will have to pay for independent financial advice first before you do this.
The rest of this article assumes that you can access your pension money if you want and looks at whether this is something you should do to help tackle a debt problem.
“Great – so I will be able to pay off my debts!”
That is quite a common reaction – in 2015 after the new rules came in pension providers reported that repaying debt was the most frequent reason people gave for withdrawing money.
If you are paying 20% or more interest on credit card debt, seeing a pot of your money locked up in a pension and then being forced to use most of it to buy an annuity which will give you little income can be very frustrating. But most people have to be very careful about spending too much too soon – you will still need your pension to fund a comfortable retirement even if the mortgage is paid off. And it’s easy to underestimate how long you might live – 1 in 3 men aged 65 will live to be over 89 so you may be retired a lot longer than you think!
How good are you with big money decisions?
For people who are good with money and who have considerable savings, the new rules provide a lot more freedom. But if you aren’t comfortable with making long-term financial plans and sticking to them, this new freedom can be dangerous. The old pension rules encouraged you to put money away for your retirement and also protected you from making the ‘bad’ decision to raid that money for living expenses whilst you are still working.
The five big problems with taking money from your pension
The biggest problem with taking money out is that you won’t have enough money when you retire. But if you are sure that you will, you still need to check out these five major factors that could make it much more expensive to take money out than you might expect:
- charges There may be high “early encashment” charges if you take money out before you retire. There can also be extra charges are for each withdrawal.
- benefits Any means-tested benefits such as ESA and Universal Credit may be reduced, sometimes to zero, if you take a lump sum from a pension. This is a major danger if you intend to give the money away, perhaps to your son or daughter to clear their debts or as a deposit, but it may even happen if you use the money to repay your own debts. The DWP has announced that you have to inform it and your local council if you take any money from your pension and you are getting benefits. This article looks at the topic in more detail, but you need advice on your own situation – go to your local Citizens Advice and ask about the interaction between pensions and benefits;
- tax 25% of the amount you take out will be tax free, but the rest will be added to your income this year. This may push you into a higher rate tax band so the tax could be a lot more than you expect – use this calculator to see how much tax you will have to pay. It may be better to take some money now and then some more in the next tax year to reduce the tax you will pay;
- “recycling rules” If you want to take over £30,000 out, check the little-known Pension Recycling rules as these can impose an enormous extra tax charge of 70%;
- final salary If you have a final salary scheme, changing this into a personal pension and taking cash out may be at a poor “conversion rate”. And you will lose not just retirement income, but a measure of inflation-protection, life assurance before you retire and a spouse’s pension as well.
Who shouldn’t take cash from their pension
Here are some situations where using pension money to pay debts would probably be a mistake:
- if you just have a temporary problem, eg because of coronavirus. It may be better to take mortgage holidays or ask for payment breaks for your debts for a few months. If you take money from your pension you may be turning a short term difficulty into a long term problem;
- cutting back on your expenses and/or looking for 0% balance transfer offers could clear the debts in a few years, then this is a better option;
- if you are in a DMP where interest is frozen and the debts are falling nicely then stick with this;
- if you want the cash to help someone else, eg clear your child’s debts or help them with a deposit to buy. Unless you are financially well off and you are sure your pension arrangements will be good without the cash you want to withdraw, you shouldn’t be considering this.
Some decisions won’t be easy:
- is your house larger than you need? Downsizing now could free up money to clear debts, give you a lower (or no?) mortgage, and reduce running costs such as council tax, utilities and longer-term house maintenance. Don’t lose your retirement income trying to cling on to a big property;
- if uncomfortable options such as a lodger for a few years or a second job would make a big difference. Some temporary inconvenience now could leave you in a much better position for decades afterwards.
Withdrawing money from your pension will not be speedy. This varies between a few weeks (if you don’t have to move your pension somewhere else) and several months (if you have to switch out of a final salary scheme first). The tax taken off may be higher than it should be and you have to reclaim the difference from the taxman.
If you fancy the idea of being able to take money from your pension when you need it and leaving the rest to grow tax-free (which sounds seductively nice, doesn’t it?) then you need to look very closely at the costs involved. For small pensions pot, the costs of doing this can be extremely high – as this article says “For many with funds of £50,000 or less and few other assets in retirement, a traditional annuity is probably still best.”
Who should consider taking this pension cash
There will be some people with debts for whom this new option is potentially very useful:
- if you are in a failing IVA. In this case being able to get some cash to propose an early settlement could be a good option (NB don’t take the cash out without first getting agreement from your IVA firm in writing about an early settlement);
- if you are in a low payment DMP and have too much equity for bankruptcy, you could use money from your pension to propose a full and final settlement to your creditors;
- if you have a secured loan at a very high interest rate, you may be desperate to clear it;
- if you have an interest-only mortgage about to end and you can’t repay it. It would have been better to have made other plans to deal with this, but if you haven’t, then being able to get at the pension cash may help;
- if you also have a good final salary pension, you may be relaxed about using a small defined contribution pension to clear debts as you won’t need an income from that pension when you retire.
I am sure there will be other situations where accessing pension cash early to solve a debt problem is a good idea. But probably not that many.
So is it a good idea for your debts?
If you are already in debt management, in a DRO or IVA or bankrupt, or you are considering one of these, then find out how it is affected by the pension changes:
- debt management plans (DMPs) and pensions;
- DROs and pensions;
- IVAs and pensions;
- bankruptcy and pensions.
If you are being harassed by creditors or are worried about bailiffs there are other options that can help. Don’t be rushed into the wrong decision, especially not one that is irreversible such as taking money out of your pension. Read about alternative ways of tackling debt and then talk to National Debtline or StepChange about which ones could suit you.
Book an appointment with PensionWise
The government has set up Pension Wise to help you understand what your pension choices are. This includes a telephone-based service and face-to-face advice. You can book a Pension Wise appointment by calling 030 0330 1001. If you are mainly interested in accessing money to clear debts, also ask for a second appointment with Citizens Advice to cover what alternatives you might have for your debts.
Be alert for scams!
Since these new ” pension freedoms” there has been a massive increase in the number of people being cold-called or texted about pensions. Many of these are scams! Reputable companies do not contact you like this. Look out for the phrases scammers often use: ‘one-off investment opportunities’, ‘free pension review’, ‘legal loopholes’, ‘cash bonus’ and even ‘government endorsement’. Be especially suspicious if the opportunity being offered involves something overseas – one pension company has said 80% of the foreign transfers it has looked at are scams.
*** This article is kept updated with the latest links ***
Options if you have an interest only mortgage
A roadmap of possible debt solutions
Can’t pay your bills & debts?
rachel says
Hi, I have a friend who once loaned me some money but he is now in trouble with the tax, I havent got the money to return the favour but have assured him that once i can get access to a static private pension i have when I am 55 he can be paid back in full. This is still 7 years away and he needs money quick to get the tax off his back,
Is there anyway the tax would accept some sort of form or paperwork assuring this for a future pay out or are there any special circumstances that I can unlock this pension early which current value is only 24k or take a 25% lump sum early given the exceptional circumstances of my friends HMRC issue? ..My friend estimates I owe him around 3-5k,
They have been garnishing his wages now for half a year but want the full lot of 24k back by July 2015. He has just bought a flat and is worried about HMRC taking it as he put a chunk of money down as a deposit on it. What are the options? and are there actually any legitimate ways or circumstances where a private pension can be unlocked early.?
Sara (Debt Camel) says
Hi Rachel, there are no ways that you can get money from your pension at under 55. Nor will the taxman accept any form of promise / paperwork from you to pay them the money in 7 years time – and anyway 3-5k from you wouldn’t sold your friend’s problem. Beware, if someone offers you a way round this it is very likely that you are looking at a scam.
Your friend needs good debt advice. It was foolish to buy this flat rather than settle his tax bill. For that amount of money HMRC can and do make people bankrupt, he should not assume that they are bluffing. If he can’t reach an agreement with them over repayments he needs to consider selling the flat rather than being made bankrupt.
Linda trigg says
Hi I have a pension that I had an equity last year I’m on benefits but also in a lot of debt I would like to clear I’m ill and never going to get better I have fibromyalgia endometriosis and gallstones and cysts on my liver but due to the other conditions I can’t be operated on should I take my pension money and pay off all my debts and how does it affect me later on in life
Sara (Debt Camel) says
Hi Linda, that is a huge question and the comment section of a website isn’t the ideal place to discuss it… A debt advisor would want to know How old are you? How large are your debts? Are you currently making payments to them? Do you have a house? How large is your mortgage? How much equity? What benefits are you on? How large is your pension pot at the moment? I suggest asking for an appointment with a money specialist at your local Citizens Advice where you can discuss these and other questions face to face.
Gilan says
Hello everyone, I applied to Scottish Widows for my 25% withdrawals, went through the full process and they agreed the money will be in my account within 10 working days, now it’s 21 days and I never received the money, tried to communicate with them several times but my effort proved fruitless.
Their call centre staffare all ill informed and they can not link you to who you need to speak to, they suggest they will send an e-mail that will take 72 hours to respond to, but they never did!
As I do have a previous loan with a bank 5 years ago and they sold it to a credit company, I am scared that they have given my payment to the credit company, are they allowed to do so?
Sara (Debt Camel) says
Hi Gilan, they are absolutely not allowed to pay your money to a debt collector or anyone else. I suspect this is more likely to be some combination of incompetence or Xmas. I suggest putting in a formal complaint about the delay and the call centre: http://www.scottishwidows.co.uk/contact_us/individual_customers/complaints.html.
When you get the money, I suggest you use some of it to make a full & final settlement of this debt? If it is 5 years old they may accept a pretty low %. If you don’t it’s quite likely they will contact you before the 6 year point and take you to court for a CCJ, see https://debtcamel.co.uk/no-calls-or-letters-about-debt/ for details.
Captain says
I am 57 next birthday and have a reasonable final salary pension due at 60 plus two other smaller ones at 65. I have recently paid off my mortgage. I have a loan which finishes in 12 months paying approx £450 pm and credit card debts of around £5k. I now need to raise some capital of about 10k for home improvements. What would you suggest as the best way forward – I have considered options of refinancing loans, 0% balance transfers and taking a max 25% lump sum from defined contribution pensions early?
Sara (Debt Camel) says
Hi Captain, other options that you could consider are
– delaying the home improvements for 3 years as you will presumably get a lump sum from your final salary pension then? When the loan is paid off you should be able to clear the credit card debt rapidly, but a 0% balance transfer now could be good.
– delaying the improvements for 1 year until the loan is paid off? At that point you could get another loan for 10k and repay all or most of it with the lump sum from your pension when you are 60. It’s a lot easier to get an unsecured loan for 10k than 15 or 20k.
I’m not sure if you were hoping to just take the 25% tax free from your defined contribution pension – this wont be possible, every time you take money out 25% of that is tax free but the rest is taxed. I suggest getting a Pension Wise appointment which would clarify this tax point and also look at all your pension options in more detail.
diane says
Hi
I have a mortgage of 30k with 8 years left to run at 420pcm. At 3.9% tracker. I am 58years and don’t reach government retirement till I’m 67 years.
I have two pensions amounting to £650 pm. Do I pay off my mortgage as at the moment I have lost my job due to illness? The government won’t help me with any money as these pensions are in payment, being more than you are supposed to live off per month.
After the £420 is paid for the mortgage I have £230 pm for my bills. That leaves me with no money for food or petrol for my car. I’ve applied for loads of jobs to no avail. I think they look at my age! Please advice I’m struggling.
Sara (Debt Camel) says
Hi Diane, if your pensions are already in payments, then you can’t get the money out to pay off your mortgage.
I think you need to go to your local Citizens Advice and ask for some advice about your situation and benefits. If you have paid enough National Insurance contributions you may be able to get some contribution-related benefits, regardless of what you income is.
Shaun says
Hi
I am 51, working and paying into a pension. In my previous job I had been paying into a final salary pension for approx 30 years. We have no mortgage, but we are starting to get a debt on 0% credit cards as we have two children at uni who we are paying accommodation costs.
Our plan is to keep paying on these credit cards and then take a lump sum from my pension at 55 which will then pay off the credit cards, this still leaves me with a pension for the future and we will release capital from our house by down sizing/moving away.
Is this the best way to do this or would an interest only mortgage be better ?
Thanks
Shaun
Sara (Debt Camel) says
It’s expensive having student kids, isn’t it!
I can’t really comment on whether your proposed plan is your best option. I’ll make a few points for you to add to your “things to think about” pile…
– if you can shuffle 0% deals onto new deals when they end, this beats pretty much any other option;
– it sounds as though you earn reasonable money. In that case I would be wary of taking money out of your pension whilst you are still working as you will be handing over a lot to the taxman in higher rate tax;
– it’s pretty hard to get an interest only mortgage these days. But it’s pretty easy to get largish unsecured loans at very cheap rates if you have an excellent credit rating, so that might be a reasonable alternative?
– I am nervous about people in their early 50s planning their financial future around downsizing/moving to a cheaper area. When push comes to shove, too many people decide they like their large house where all their friends are.
Gordon Harrison says
Hi,
I’ve a defined contribution pension that is maturing in a few months time that I wish to fully cash in which is worth £16500.
I’m in full employment paying into a defined benefit (final salary) pension and I’m not planning to retire for at least 7 years.
I don’t need the defined contribution pension for the future and I want it to fund a new kitchen! My question is; will cashing it in affect my on-going final salary pension? I think it’s just a question of tax but I don’t want to affect my work pension in shape or form.
Thanks
Gordon
Sara (Debt Camel) says
Hi Gordon, you may want to talk you pension people at work – they are the experts – but as far as I know there wouldn’t be any impact on a final salary pension scheme you are already contributing to.
sharon says
Hi . I have a frozen pension from 20 years ago that was running for 15 years. i am coming up to 55 years old . have lots of debt and in trouble with mortgage . I have 2 more pensions running at work and another 2 and a half year one frozen which they will not let me use as it is under 5 years. I am thinking of cashing in my 15 year frozen pension (to clear my debts as most are secured) can i do that and keep the other pensions running at the same time. would i have to pay a lot of tax. thanks Sharon
Sara (Debt Camel) says
Yes you can just take money from one of your pensions and leave the others running. There is a calculator here which estimates what tax you might have to pay: https://www.pensionwise.gov.uk/take-whole-pot. You may also have to pay some charges to take your money out.
I can’t say whether this is a good idea for you or not. Mortgage arrears are serious and you do need a plan to deal with them. I suggest you should contact your local Citizens Advice and ask for two appointments, one to discuss your debts and mortgage and one with Pension Wise that will look at all your pension options.
David says
Hi sara im 61 on my second marriage ,my first one wiped me out ,lost the house got into a lot of debt.we are on a interest only mortgage which has 3 years left to run,we will not be able to pay it off at the end ,we are very worried that we will lose our house,we would like to stay there if possible.I have no credit ratings im blacklisted and cant get another mortgage.I have a finale salery pension from a pervious employ ,when i was 50 i took 25%.please can you help us.
Sara (Debt Camel) says
Hi David, interest only mortgages are very difficult for people of your age. See this other article which looks at the subject directly: https://debtcamel.co.uk/interest-only-mortgage/
Jane says
Hi i am 57 not worked since 1995 but I am receiving income related ESA. I have just taken 25% of my pension amounting to 8400 approx with a monthly pension of 104 how will this affect my ESA and housing benefit I also get DLA high rate due to a life long disability.
Thanks Jane
Sara (Debt Camel) says
Hi Jane,
rather than me give a broad summary, there is a good calculator here https://benefits-calculator.turn2us.org.uk/AboutYou that will answer your questions with exact figures!
Simon says
Hi Sara,
I’m just coming up to 65 and will be collecting my Basic Pension next month – already drawing a Final Salary pension of over £8k per annum – so I’m already paying tax on a part time job and some small self-employed income. I have another small pension pot worth just under £10k that would pay £950 per annum thanks to an excellent GMAR, but after tax that’s obviously rather less income. I’ve been offered a surrender value of about £8k. I do have some unsecured debts and a bank loan of about £8k which I’m considering settling early. That will boost my disposable income, and allow me to pay off the unsecured debt more quickly. My thinking is that the net £800 a year from the small pension will suffer from inflation in future years, and even allowing for Tax free threshold to increase as it has done for the last 10 years, I will be better off to pay down my current debt.
Any thoughts on the Present Value vs Future Value calculations for this?
Great site by the way!
Sara (Debt Camel) says
I can’t give you advice on this. It is, as you say, an excellent GMAR. Have you considered what your life expectancy is, depending on your own state of health? yes inflation will affect the pension – but it also effects your debts as well – they are frozen in this year’s money.
I don’t know what other options you have for clearing these debts. If your credit rating is good, you may be able to refinace some at low interest rates or a 0% balance trransfer.
Mrs E says
Hi Sara
I am 55 next month. I am the sole earner as my husband is disabled and isn’t entitled to any benefits. We have 5 years on our mortgage which has recently been fixed until the end of term. We have an ‘overdraft’ (reserve) of around £1500 which will need to be paid within the term of the mortgage and my husband has £850 on a credit card. I have a bad credit rating, so getting a loan or a zero Transfer on the credit card, as my husband has no income, is out of the question. I had a pension which was frozen in late 1990s and have received a statement which shows a current amount of short of £3500pa. Would it be advisable to withdraw the entire amount to pay off everything and give us a little cushion? I am intending joining the governments workplace pension in next few weeks as my employee is implementing the scheme.
Sara (Debt Camel) says
Hi Mrs E,
Is your mortgage a repayment mortgage which will be cleared by the end of the term?
Do you have other debts? You mention that you have a bad credit rating, is there a particular reason for this?
Mrs E says
it is a repayment mortgage, so it will be cleared at the end of the term.
No other debts.
Was heavily in debt (almost £30k) but settled in full or part a few years back. (Was on a debt management plan with StepChange) Wasn’t planning on getting into debt ever again, but I miscalculated something and some stupid bank agreed to give my husband a credit card when he doesn’t work!!!
abi says
There is some great advice here – thank you for sharing
Andy says
Hi,
I am 64yrs this coming October and my mortgage will be paid off the following October when I am also able to receive my state pension
I currently receive a monthly annuity which added to my state pension will allow me to live reasonably comfortably.
My problem is that I have two secured loans that will continue to run two years after my retirement date.
I am looking to use funds from two frozen pensions which are currently worth around £25k to address these loans as any potential annuity would have a negligible impact on my income.
would I be still be able to take a tax free lump sum followed by a drawdown arrangement with the respective Insurance companies ?
Sara (Debt Camel) says
Hi Andy, this may well be a good idea but the lump sum / drawdown options can be complicated. I suggest you get a Pension Wise appointment to discuss them.
Vikki says
Hi I have applied for a lump sum payment of 16500 from my pension pot. I have a debt of an overpayment of tax credit of 2200 – will this be deducted from my payment automatically?
Thank you
Vikki
Sara (Debt Camel) says
No, not unless there are some unusual circumstances you would already be aware of.
Tom says
Hi
I am 56 years old and have a mortgage on my house with 5 years left to run.
It currently stands at £44,000 at 2.7% Offset against £14,000 savings (So effectively only paying interest on £30,000)
I am overpaying by £100 pcm. (Minimum payment is just under £700.00 pcm) so I am forking out £800 a month..
One of my pension pots is frozen but I can cash it in to the tune of approx. £40,000
This pot promises me an annuity of £2,700.00 a year (£225 pcm) at retirement in 10 years’ time.
I currently earn £34,000 p.a. gross so I am a lower rate tax payer
I have a very good pension scheme that I am paying into and I am also making additional voluntary contributions towards an annuity pot which will hopefully replace the £3,000 p.a. I will be losing if I do cash in the other pot!.. I will have the OAP on top of this lot on retirement..
Here’s my question. Should I cash in the pension pot and pay off the mortgage or not?
Options
•1) Carry on paying mortgage and leave pension pot alone.
•2)Take 25% tax free (£10,000) and put it in the mortgage offset pot making it £24,000 or pay it off of the mortgage as a lump sum payment. With this option I would be paying interest on only £20,000 of the mortgage
•3) Take the whole pension pot (about £34,000 after tax) and pay off about £30,000 of the mortgage balance leaving about £14,000 against the offset balance of £14,000 (i.e. no interest). With this option I could either increase my payment to £1000.00 pcm and pay off in 14 months then plough the money into my other pension pot or alternatively I could decrease my payment to minimum of roughly £160 pcm for the remaining 5 year term of the mortgage and increase monthly payments into my AVC pension pot further.
Option 3 would also push me into the 40% tax bracket by about £6,000 for the coming year.
Any ideas?
Tom
Sara (Debt Camel) says
Is the pension you are thinking of cashing in a money purchase scheme or a defined benefit (final salary) scheme?
How much are you paying in additional pension contributions at the moment?
I don’t think your option 2 is straight forward, you usually can’t just take the tax free part out and leave the rest of the pension behind.
ROC says
I am coming up to 54 and have a good pension that I can access next year at 55. I am in debt and need to access a 25% (maybe less) of it (tax free lump sum) to clear these debts.
Am I able to do so ?
Also is it possible to use some of the money to invest in a business as working capital?
many thanks
Sara (Debt Camel) says
If you can take the money out then it doesn’t normally matter why you want to do it. Obviously, some reasons are better than others, but from the point of view of your pension company, it’s just your decision to take the money out.
I suggest two things. First that you talk to a debt adviser about your debts – there may be other alternatives for dealing with them that will leave you pension untouched for when you retire, see https://debtcamel.co.uk/more-information/where-to-get-help/. Second talking to Pension Wise about your pension options: https://www.pensionwise.gov.uk/en
ROC says
Am I able to take the money now before I reach 55yrs of age.
Yes I will certainly contact pensionwise.
Sara (Debt Camel) says
No, the new “pension freedoms” apply after 55.
Linda day says
I am 56 years old I have considerable debts is it better for me to use my pension to pay them off or the next step would be to go bankrupt which I really don’t want to do. Please help.
Regards linda
Sara (Debt Camel) says
That is a huge question. It would depend on how large your debts are, whether you are working (because money you take from your pension now would be taxed as income, so you could end up paying higher rate tax on it) and have any spare income for your debts, how good your pension arrangements are etc.
Also as you are over 55 in some situations an application for bankruptcy may be refused if you could repay the debts from your pension. But there are other possible alternatives such as a DMP or an IVA. A DMP making low payments for a while then taking some pension money out to offer low full and final settlements could be an option.
Could you give some more details – then perhaps i could suggest who you should talk to about your situation.
Chris Burton says
Hi Sara,
I think in know the answer anyway (unfortunately) but I am 38 with around 10k in debt, which is crippling me.
I have three pensions. Two with Aviva and another one from my time in the civil service when I was young.
I have explored all of my options to cope with my debt, and cannot afford to destroy whats left of my credit rating by going into a DMP
Is there no way at all that I can use one of the pensions I have to clear my debt? In my circumstance, I’d be happy to lose 55% to the taxman
Thanks again for all your help.
Sara (Debt Camel) says
No it is not possible to access your pension before 55.
I suggest that if your credit rating is bad, then a DMP will make little difference to it… read https://debtcamel.co.uk/credit-rating-worries-debts/ and please tyalk to StepChange about ho0pw a DMP works and whether you have any better options.
Richard says
What an amazing website. It has already answered some of my questions, thank you.
I am approaching 55 and I have a small pension pot of around £18000. I know that I can take out upto £4500 but I still have a couple of questions that I cannot seem to find the answer for.
My wife is disabled so I am in receipt of benefits, they are income support, carers allowance and help with rent and council tax. My wife also receives PIP.
I spoke to citizens advice and they said that if I was to take the four thousand five hundred pounds out of my pension pot, it would not affect my benefits as it is under six thousand pounds. I probably would not need to take this much, however, even though it is under the six thousand pound limit, would I need to inform the DWP and the Housing Benefit Department and tell them that I have withdrawn it?
Also, I am quite confused as to what happens with the rest of my pension pot. I have had my consultation with Pensionwise, but at the time, I had not thought of this question.
What happens to the rest of my pension pot and would it be classed as an investment that could have an impact on my benefits no matter what pension option I choose. I am quite happy to leave the it untouched to cover mine and my wifes funerals, as we have no life insurance.
Thank you.
Sara (Debt Camel) says
Can I ask why you need the money? Do you have debt problems?
Richard says
To be fair, I could manage without the money. My cooker has a broken oven door and the fridge freezer, washing machine and tumble dryer belongs to my step daughter who will need her appliences back soon, so I was hoping that I could replace them. However, I am happy to buy second hand stuff. Also, I have two sisters that live over three hundred miles away in Cornwall that I have not seen in years so, i would probably use some money to go and visit them and stay over for a few days. I would not need to withdraw the full amount of the tax free allowance.
I do have a debt management programme, but reading your advice, it would be better if I just carried on as I am with it. My payments are £249 a month and it will be clear in approximately four years. If I was to withdraw my entire pension pot, after tax and paying off my DMP, I would not be left with much.
Sara (Debt Camel) says
who is your DMP with? because it sounds to be as though you are paying more than you can afford. If your DMP payments were lower you would be able to manage better.
Richard says
Thank you. My DMP is with Stepchange. I think it is reviewed every year.
Sara (Debt Camel) says
OK, a couple more questions – I really do get round to answering your questions at the end!
How long is it until you are 55?
In your DMP, is your wife’s PIP taken into account? If it is, do you think the DMP properly allows for all the extra costs you have because of your wife’s disability – this can range from minicabs to hospital appointments, getting help around the house, extra heating or water costs, whatever she needs to help her.
Are you renting privately or social housing?
Richard says
I am 55 in two weeks time.
The DMP does take into account my wife’s PIP. Obviously we are not left with huge amounts of spare money each month but the payments are affordable as we budget very carefully.
We live in social housing.
Sara (Debt Camel) says
OK so you have two options here (or some combination of them)
1) you could ask StepChange to reduce your payments so you repay the rest a bit slower. You are obviously doing well at budgetting but that sounds VERY tight to me and that gets exhausting after a while. And you should not be left so short of money you can’t replace an over or a fridge… there should be a line in your budget for replacing worn out white goods and other household objects.
If your payment was reduced by £100 a month that would let you live a lot more comfortably and and it would add less than two years until your DMP finishes.
2) you can take the tax free money out of your pension. It sounds to me as though what you would want is the section described as “Use your pot to provide a flexible retirement income – pension drawdown” in here https://www.moneyadviceservice.org.uk/en/articles/options-for-using-your-pension-pot. If you go back to PensionWise they can confirm this.
If you do this, the rest of your pension is invested while you are in drawdown. But it is still “inside your penion pot” not in your bank account and it won’t affect your benefits.
One possible problem with doing this is that the charges you will have to pay for having a pension in drawdown can be high. You need to find out what these are before making a decision.
Richard says
Thank you so much for your time and advice. I really appreciate it.
Best wishes,
Richard.