The pension changes in April 2015 mean that many more people aged 55 and over will be able to take some or even all of their pension pot in cash. You need to know how this may affect you if you are considering an IVA. If you already have an IVA, you may be wondering if your pension is safe. I’ll look at these two situations in turn.
First a warning: IVAs are individual arrangements and it is possible for almost anything to be included or excluded in the detailed terms and conditions. You will have to look at your IVA paperwork and / or talk to your IVA firm to tell if the generalisations here are applicable to you. Think of this article as an overview which gives you pointers about what to look for.
If you are thinking about an IVA:
“Can I keep my pension safe in an IVA?”
If you will be over 55 at the end of your IVA you need to discuss how pensions will be handled with your IVA firm. It’s best to get a clause that excludes your pension completely; second best is a clause which specifies clearly under what circumstances how much can be accessed.
In my opinion it would be dangerous to agree to an IVA where pensions are not mentioned or the wording seems vague. The pensions area is very fluid at the moment and you don’t know how it could change over the next few years, with clear wording you will be protected.
If you are in any doubt, talk to a different IVA firm – there are dozens of them that would love your business! I can’t say which firms will adopt what wording as it’s going to take a while for this to become known. I hope standard wording will be included in the IVA Protocol at some point so this will be easier. A good place to discuss what an IVA firm is proposing and whether there are better alternatives is this IVA forum.
“Should I use my pension to clear debt instead of an IVA?”
If you are over 55 and have money in a pension, then the April 2015 pension rules give you a new option for tackling your debts. As that article points out, there are a lot of things to consider, so don’t rush into this. I look at the general pros and cons of IVAs in Debt Camel’s Guide to IVAs.. If your debt situation is serious enough for an IVA to be a real possibility, then it would be sensible to consider if using your pension pot is a good alternative. Indeed if your pension pot is very large you may find that your creditors will not accept an IVA.
However there are important negative factors for taking money out of you pension. These include:
- you will be retired a long time, probably decades. Don’t make a choice that will leave you struggling when you retire if there are better ways of tackling your debts now;
- what tax you would have to pay on withdrawing the money from your pension – depending on your income and how much you are taking out, you may have to pay between 4% and 45% tax on it;
- if you get any welfare benefits, you need to talk to a debt advisor such as Citizens Advice or National Debtline about whether taking money from your pension and paying it off debts could affect your benefits;
- if you have a pension that is linked to your salary, you could lose a lot of its value by switching it to a money purchase pension in order to take money out;
Another approach would be to opt for a Debt Management Plan for a year or two now instead of an IVA. After that you may then be able to offer individual creditors full and final settlement offers using money from your pension.
Pensions if you are already in an IVA:
“I will be under 55 when my IVA finishes”
If you will be under 55 when your IVA ends, the pensions changes aren’t relevant and your pension is completely safe. There is only one minor complication – don’t forget that your IVA may potentially be extended beyond the normal 5 years if there is equity in your house that you can’t release or sometimes if your payments are reduced for a period.
“I don’t want to touch my pension”
If you don’t want to withdraw any money from your pension before your IVA ends, then it is very likely to be safe. It could only be at risk if there was a specific clause in your IVA which obliges you to release money from your pension. This isn’t a common term and anything like it should have been discussed with you before the IVA was agreed, so if this doesn’t ring any bells with you, it’s very unlikely you have a problem.
“I would like to withdraw some money from my pension”
Life in an IVA can be tough and you may be hoping that the new pension freedoms will enable you to replace your car or get a new boiler.
If there is no mention of your pension in your IVA terms and conditions, then if you take money from your pension it is likely to be seen as a “windfall” and it may have to be paid to your creditors – not what you wanted! Before you do this, you need clarification from your IVA firm that it will not be touched – I would want this in writing.
If your IVA has a clause which says your pension is excluded this should be fine. As a general point though do think about the four big negative factors I have listed above for taking money out of a pension.
“I want to try to settle my IVA using money from my pension”
A full and final settlement offer could be a good use of your pension money if you are having big difficulties with your IVA. You do however want to offer the minimum amount possible so that your future pension is not wrecked. You need to talk to your IVA firm about what could be acceptable, they can then propose this to your creditors and if your creditors agree, you can withdraw the money. Don’t take the money from your pension without having the settlement agreed first – this is important because if you do, it may be taken as a “windfall” payment by your IVA and not as a settlement amount.
If you are not having major problems managing the IVA payments then a settlement offer is still a possibility, but a low offer would be unlikely to be accepted – it’s difficult to give any guidelines but I have talked through some of the issues here. Again consider the negative factors listed above. If you are going to end up paying say 30% tax (it could even be more) on the money you take out, then this may not be a good deal for you at all.
So is a pension safe in an IVA?
Whether you pension is safe in an IVA after the April 2015 pension changes will depend on the exact wording of your IVA. If you haven’t yet started an IVA, you need to be sure that you are happy with what is being included about your pension. If you are already in an IVA, then your pension will probably be safe unless you want to take some money out of your pension – but you need to read your T&Cs and talk to your IVA firm about this.