You may be worried about whether your pension will be safe if you are already in, or have finished, a Debt Relief order (DRO), or if you are thinking about applying for a DRO.
The 2015 pension changes mean that many people over 55 can now withdraw some or all of their pension. so what happens if you take money out? Can you lose your pension? Can you get a DRO if you have a good pension?
I have tried to keep this article simple and jargon-free.
At the bottom of the article there are links if you want to know more. It is always worth talking about your concerns with the debt advisor that is setting up your DRO or, if your DRO has already been approved, the advised that helped you set it up.
If your DRO has completed
If your Debt Relief Order has already finished, then your pension is completely safe. You can withdraw money from it or start taking an income from it whenever you want.
This may not be such a good idea as it sounds, for several reasons.
- you may have to pay a lot of tax when you withdraw the money.
- there may be early encashment charges, withdrawal charges or other deductions. These additional charges depend on where your pension is when you take the money out.
- accessing the money could badly affect any means-tested benefits that you receive.
I suggest that if you are thinking about this, you should get a Pension Wise appointment. This will make sure you are aware of all the different options for using your pension – there are a lot of them! The appointments are free and can be over the phone or face-to-face.
Pension Wise won’t provide debt advice, but when you set up a Pension Wise appointment, you can also ask for an appointment at your local Citizens Advice to look at your debt situation and any effect on your benefits.
If you are in the DRO 12 month period
If your DRO has been approved by the Official Receiver and you are still in the one year period before it ends, you must not withdraw any money from your pension or start taking an income from it until the DRO has ended.
If you did take some money out or started taking an income from your pension, you would have to inform the Official Receiver and your DRO could be cancelled, so your debts would remain – not a good idea!
By leaving your pension untouched, it will be safe and your DRO will continue however large your pension. You can safely take money out after your DRO completes (see above).
If you are thinking about a DRO
If you will be under 55 on the day your DRO is approved, it doesn’t matter how large your pension pot is, it will be ignored as you will be too young to access it at that point.
If you will be 55 or over when your DRO is approved, the Insolvency Service’s guidelines say:
“Where the debtor is over 55 and has access to an undrawn personal pension fund intermediaries are asked to consider whether the insolvency test has been met and at the date of the [DRO] application .. the debtor is unable to meet their debts … In a DRO, an intermediary who is concerned that the available fund is considerably higher than the outstanding debt is asked to contact the DRO Team to establish whether the official receiver will in the circumstances grant the application.“
This is saying if you could have taken money out of your pension and that would have been enough to repay all the debts that would be included in your DRO, then you are not really “insolvent” and your DRO application will not be approved.
The guidelines say “personal pension”. I understand this refers to a defined contribution pension, where you have a “pot of money” that you could access. It doesn’t refer to a defined benefit scheme, where your pension will be linked to your final salary.
If you have a defined benefit pension that isn’t yet being paid to you, this can be ignored (unless it will start to be paid to you within the one year DRO period… if this is the case you must talk to the adviser setting up your DRO about your situation.)
If your pension is smaller than your debts, then you don’t have a problem. Your DRO will be approved – assuming you meet the other criteria! – and your pension will be safe.
The Insolvency Service hasn’t said exactly what the “insolvent” calculation is. It will take into account any tax that will be paid and the charges that would have to be paid to withdraw the money. The tax plus charges could come to a lot more than you might expect – see the links at the bottom of this page.
“Help – this sounds complicated”
In practice, it won’t be for most people. If you are already getting your pension, or you are under 55 or have a final salary pension scheme there can never be any issue about your pension.
And you don’t have to sort it out, you can get expert help for free from the adviser that will set up your DRO.
To set up a DRO you must go to an Authorised Intermediary, for example at your local Citizens Advice or National Debtline. They will work out if you meet all the DRO criteria – total debts, surplus income etc.
If you are over 55 with an undrawn pension, this will be another thing the Authorised Intermediary sorts out. If it is complicated, they will talk to the DRO team at the Insolvency Service.
Don’t assume that if your pension is larger than your debts that a DRO isn’t possible. Because of taxes and charges your DRO may be accepted.
What are your options if a DRO won’t be approved?
If you are told a DRO will be rejected because your undrawn pension is too large, then it may be sensible for you to look at using some of your pension to clear your debts.
This could include making full and final settlement offers to some of your debts.
If taking your pension early would involve a lot of extra tax and charges, it may be better to postpone this for a while, possibly having a token payment debt management plan in the interim.
The other insolvency options aren’t likely to be possible alternatives. If you qualify for a DRO because of your low spare income, an IVA is very unlikely to be a good option as it involves making payments for 5 years – many IVAs fail because people cannot keep up these payments. There will also be an “insolvency” test in bankruptcy, so too large a pension will rule that out.
Take money from your pension to pay debt?
What happens if you inherit in a DRO?
Do you qualify for a Debt Relief Order?
Steph says
Hi can i pay into a pension if i apply for a debt relief order ? At my work place im automatically enrolled in a pension do i have to opt out
Sara (Debt Camel) says
You can carry on with your normal contributions. There are rules which mean you can’t start to pay thousands a month into your pension, but a normal work scheme you already belong to isn’t going to be a problem at all.
Jon Harris says
Hi Sara, I have had a DRO as from September last year 2018; I now have had information of pensions that I quite honestly forgotten about. I have now managed to look again at what I have as pensions. I became 60 this month and had a letter addressed to “the occupier” I had to confirm to the West Midlands Pension Fund that I lived at this address. This prompted me look at what I have got. I did send in details of a very small pension from a previous employer (less than £1000) that was send in with my original application for the DRO. My DRO consisted of approximately £13,000 and I now have discovered that I have three more pensions whose combined value are approximately £20, 000. I haven’t yet drawn on these pensions as I did forget I had them but I have made enquiries to withdraw £1800 from one of them. What do I do now, do I have to inform them? and will I be allowed to take some of the money as I intended? Thanks, Jon
Sara (Debt Camel) says
I suggest you talk to the adviser who set your DRO up.
David says
Hi Sara, i entered a DRO in March 2019 with debts of £10,000, i have now being contacted by a pension company who informed me that i
contracted out into SERPS in 1989 and now have a fund with £23,000 in it.
Will this affect my DRO, i have not drawn any money from it, i am 65 and retire May 2020.
Thanks David
Sara (Debt Camel) says
You were unaware of this pension when the DRO application went in?
David says
Yes, today was the first time i have had any contact with the pension company.
Thanks David
Sara (Debt Camel) says
I havent come across this before but it sounds like an omission from your DRO application so it needs to be notified to the ORs office. I suggest you talk urgently to the adviser who set up your DRO about this and whether your DRO is likely to be revoked.
David says
Thanks for your fast reply, i will let you know the outcome.
Regards David
Izzy says
Dear Sara my DRO moratorium finished in December 2019 can I takeout a lump sum from my small pension or should I wait a further 3 months until my dro has disappeared from the insolvency register.
Many thanks
Izzy
Sara (Debt Camel) says
Your DRO has finished now, you can do what you want with your pension. But if you are working you may have to pay extra tax on it. And if you aren’t working you should talk to a benefits adviser if it is more than 6k as it could affect your benefits.
Michael Swan says
Hi Sara,
My situation involves timing. Illness caused me to not be able to pay an ever increasing amount of debts. The amount was approximately £15k. The brilliant Citizens Advice Service guided me through and sponsored my DRO, which started on March 12th 2019. I am on Universal Credit and pretty much left alone by them, due to my age (61) and situation. After a year ‘in the doldrums’ I have been given the opportunity to start up a beekeeping business.
I am now able to cash a small pension of £7k after tax. I need the money to finance the buying of equipment etc for this venture. This ideally needs to happen at the beginning February. If I have to wait until after March 12th 2020, to draw this money, I will lose the advantage of prices at this time of the year, which are about 15% cheaper. I will also face a lot of work in a shorter amount of time to set everything up before the summer! I would rather not contact the DRO people and thus draw attention to myself over this, but do need to know what the chances are of my DRO being withdrawn with just a few weeks to go. Any thoughts?
Regards, Mike
Sara (Debt Camel) says
About 100%. You can’t take the money from your pension until your DRO has finished.
That sounds like an interesting new career but you are going to have to delay it until mid March.
Michael Swan says
Hi Sara,
That’s told me then! Incredibly enough a Citizens Advice operative, dealing with my rent problems, but NOT a DRO expert, told me not to worry about it. She said that I was a ‘small fish’ and no one would ever be checking me. The trouble always is though, that ‘small fish’ are easier to fry. I have some experience in this sort of situation already, so have been wary! I will wait until the end of February before applying to release this money, even though it will cost me. Cashing out this money earlier, may cost me even more in the long run I think!
I’ve been a beekeeper for seven years. As I can no longer follow the career I had, it seems like the thing to do. It’s a shame I have had to endure three years of financial degradation, due to illness, before getting to this point. Then another obstacle in my way. Am I bitter? Too right I am! Mike
Sara (Debt Camel) says
You have your clean start, I hope you make a sweet living… we need more bees!
Darren lunt says
Iwas advice to take a dro out haven’t done it yet but I have a pension which is under 2,000 pounds that the pension service said I can take out in July as Iam 55 I got retired from work for medical reasons and now on ESA contribution payments taking out my pension would it affect the dro kind regards Darren
Sara (Debt Camel) says
You shouldn’t take money from your pension when you are in a DRO but can afterwards. I doubt a pension this size will affect your right to get a DRO but talk to a debt adviser to confirm this.
Stephen says
Hi i have put in for a debt relief order for just over £8000/£9000 in December they got in contact with me about my personal pension it’s worth £23000 i totally forgot about the pension i am not paying in to a pension anymore am only on National minimum wage and only work 14 hours a work i have sent the necessary paper work over to the dro advisor i was just wanting abit of information would the dro be accepted if my pension is worth that much am have 3 more years left before i retire
Thanks Steve
Sara (Debt Camel) says
Was your DRO application submitted so it is the Insolvency Service that is asking? It is possible your DRO may be rejected.
DAVID Lowe says
Hi.
I am looking at going into a DRO for 15000. I am on universal credit for health reasons and due to the pandemic I decided to cash in my Australian pension. To pay personal family loans back. I am 47 and very worried they will take my lump sum (23000) off me. I will have 3000 left after repaying my family. Any advice??
Sara (Debt Camel) says
You can’t repay family loans and then put the rest of your debts into a DRO. I don’t know where you are in the process of withdrawing money from your pension, but I suggest you need to talk to a debt advisor now about all your optionsbefore you make some decisions that you may later regret. Phone National Debtline on 0800 800 4000 ASAP.
Mike Swan says
Hi Sara,
An update. I didn’t do anything until I knew that my DRO was over, as you advised. I then took the money, paying emergency tax. The £7500 was then invested in bee-related stuff straight away At the same time I applied for an Enterprise Allowance grant. My business plan was accepted. I now get paid £65 per week for three months, then £35 for another three months. This is on top of my Universal Credit payments. I am now not regarded as unemployed, but ‘self-employed’ as a beekeeper. Awww….bless the governments thinking on all this! The money I receive is a drop in the ocean, compared with the investment in this enterprise I have made, but better than nothing! I have also applied for a tax rebate on what I paid on the pension draw-down, as I have nothing in the way of property or savings. If I get this tax back, it will be put in to my business. I will get there eventually! I have thought to change my company name from ‘Woodside Bees’ to HS2(BEES)PAYMEMILLIONS. Do you think this will work? LOL
Jane says
Hi,
I am 6 months into my DRO. I have 4 or 5 pensions from previous jobs. I have recently become unemployed and finding it difficult to make ends meet. One of the pensions was set up 12 months ago and only ran for 3 months. It’s worth just £245 but even that small amount of money would make a huge difference to me right now. Is cashing in and closing such a small pension acceptable or should we not touch any pensions at all until DRO is finished. I am now 55 but was 54 when the DRO started.
Sara (Debt Camel) says
For such a very small amount you may be ok. I suggest you talk to the adviser that set up your DRO.
Also it sounds as though you could do with some benefit advice to see if there is any other help you can get eg from your local council – talk to Citizens Advice about this.
Mellissa says
Hello I have just applied for a DRO with debts of around £28,000 – in the process of obtaining the DRO – i am 54 and stepchange informed me that they may reject my DRO as I have a workplace pension of £43,000 – however i am not wanting to withdraw from it even a portion of it tax free at 55 as i need this for future accommodation when I retire at 67 – as do not own a home – will they reject my dro because of this?
Sara (Debt Camel) says
when is your 55th birthday?
Mellissa says
Hi its the 27 june 2023
Sara (Debt Camel) says
I think you should be OK as you are not yet 55. The “can you draw your pension” test is part of checking whether you are “insolvent” at the point you apply. At the moment you cannot draw your pension as you are not yet 55.
Let us know what happens?
Mellissa says
Really kind – I shall report back – fingers crossed and thank you for taking the time to reply 👍😊
Mike Swan says
An update. The first lockdown started within days of me officially becoming a self-employed beekeeper. I’ve just finished my third season now. I am very committed, with further investments being made, totalling at least £20,000 over that time. The strange thing is though, that Universal Credit seem to regard my ‘investment’ as a debt to them! I have pointed out on more than one occasion that 1. This ‘debt’ is is not owed to them, but exists in the form of my ‘assets. ‘ 2. Those ‘assets,’ are bee-stock, hives and associated equipment. 3. They are are currently worth well over £30,000. and should move me into the position to break even start to make a profit soon.
A side note here: Obviously, honey sales have been hit hard by the current economic climate, so this years income has not been good at all.
As for Universal Credit? They are threatening to send me back to being a ‘job seeker,’ as I have not hit their target of profit within two years. The last time I was asked why I didn’t get a ‘real job,’ I pointed out that beekeeping is very intensive and time consuming most of the year. I asked if they were expecting me to ‘dissolve my assets’ to seek a ‘real job?’ If this was the case, I have offered to bring 25+ colonies to the job centre, to clear the debt they say I have to them, THEN get a real job!
Sara (Debt Camel) says
I think you should talk to Business Debtline about your situation and your options: https://www.businessdebtline.org/
Michelle Ramsey says
I have a dro of which iam 9 months in, I can take 3800£ from my pension which we really need as am on benefits and struggling, will this affect my dro. Thank you
Sara (Debt Camel) says
Taking £3,800 from your pension is VERY likely to result in your DRO being cancelled… you need to leave any withdrawal until after your DRO has completed.
Can you say some more about your circumstances and why you need this money urgently?
Michelle Ramsey says
My husband is disabled and I’m his carer so I don’t earn any money just carers allowance and joint esa so are struggling
Sara (Debt Camel) says
I think you should talk to your local Citizens Advice and see if there are any local grants or benefits that you could apply for. It would be a very big mistake to take this money from your pension now.
Carol says
I have just got a DRO but now my New State Pension increase in April will give me an extra approx £77 a month . However my old car needs a new cambelt which will cost a few hundred and my student daughter will be home in May which will increase electric and water usage and food costs etc.I think I will still end up under the required £75 minimum left over each month.Do I have to inform the Insolvency service of my state pension increase? Also last year I paid for my car insurance in full but can not afford to do so this July when it’s due.Can I pay my renewal by direct debit this time which would use a lot of that pension increase.I know premiums will be higher because of the DRO. My worry is , am I allowed to take out a new direct debit while I have a DRO.Thank you
Sara (Debt Camel) says
You don’t have to tell the DRO Unit at the Insolvency Service about an increase in your State Pension if your only income is from benefits. See https://debtcamel.co.uk/dro-income-up/
Carol says
Hi Sara,
Thank you so much for putting my mind at rest and taking the trouble to answer so swiftly.What an amazing service you are doing.
All Best Wishes Carol
Lorraine Mitchell says
Hi, am in process of applying for a dro and the advisors/ intermediaries at citizens advice keep asking for info on my pension. I have only ever worked part time and have a relatively small defined benefits pension with WYPF. I am 63 so not ready to retire yet, so can’t draw down on this. Citizens Advice keep asking for written proof of the total value of my pension?? They told me to speak to pensionwise/ moneyhelper but they don’t give advice on defined benefits pension. WYPF have said that providing my statement should suffice which I did, but now another advisor needs more info to proceed with dro?? Can you advise me please
Sara (Debt Camel) says
Ask the adviser to be clear exact what is wanted and why as it is not possible to draw your defined benefits pension early and the amount is irrelevant.
Is this your local Citizens Advice or their DRO hub?
Lorraine Mitchell says
They want the cash equivalent transfer value of my defined benefits pension as it is an asset
DRO HUB in Stoke, but initially was Manchester dealing with it.
Sara (Debt Camel) says
Ok this is wrong, tell them again that this is not a personal pension, you cannot access it early, it is a defined benefit scheme. Tell them you want then to reconsider and you will be making a complaint if they do not get on with the DRO.
Lorraine Mitchell says
They have asked again for cash equivalent transfer value, which WYPF are now compiling for me. Am a bit worried now as to what will happen next. I read on your posts much earlier that defined benefits pensions are not considered when applying for DRO but maybe things have changed
Sara (Debt Camel) says
No they haven’t. I have no idea why you are being asked for this.
Mark says
Hi
I was working on doing a Dro and only now realise tgat I should have done it before I was 55 but after reading comments think my pension pot and the fact I’m 58 won’t allow me to do either a Dro or even go bankrupt. I was counting on the pension for my old age and can’t afford to lose any of its value. Is there anyway round this or will I have to cash in my pension to pay the debts I can’t afford?
Also if I have to cash my pension in how will that effect my universal credits and HMRC tax I pay on self employment as the amount cash I would need from the pension pot to pay 25,000 debts off would put my in higher tax brackets.
Sara (Debt Camel) says
Have you defaulted on some or all of these debts? How much of the 25k is consumer debt – loans, cards, overdrafts etc. how much is business debt? Are there tax debts in there?
How large is your pension pot?
You are renting?
Mark says
Thanks for replying.
Debts are made up of bounce back self employed loan (haven’t paid any). UC over payment. Water Gas elec.
No tax debt. No business debt.
Pension pot est 130,000. Haven’t drawn down any.
In rented house. Have been signed off sick for the last 2 years and waiting for operation.
Sara (Debt Camel) says
how large is the bounce back loan?
Gary says
Hi there,
Just to be clear here, I have money in a few old workplace pensions.
I’m not exactly sure of how much I can draw but I think somewhere in the region of £25k (that would be total and not just the tax free part)
So, if this was the case and my total debt was say £20k, could I be made to withdraw my total pension to pay this back?
Many thanks
Sara (Debt Camel) says
so you are over 55?