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 – you may have to pay a lot of tax when you withdraw the money, there may be a lot of additional charges and it could badly affect any benefits that you receive – but these problems are not related to your DRO.
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 affordable. There will also be an “insolvency” test in bankruptcy, so too large a pension will rule that out. )
Useful links
- The Insolvency Service published a summary of its guidance on how Debt Relief Orders will be affected by the pensions changes.
- 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 affect on your benefits.
- How much tax might you have to pay: see the table in this article.
- You may face two sets of charges: early encashment charges (these depend on who you pension is with at the moment) and withdrawal and other charges (these additional charges that will depend on where you pension is when you take the money out).
Pensions freedom – a new option for debts
What happens if you inherit in a DRO?
Do you qualify for a Debt Relief Order?
*** Updated 15/05/15 with additional clarification eg around defined benefit / defined contribution schemes
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.