The pension changes that came in in 2015 gave many people over 55 a new option for paying off their debts, by taking money from their pension pot.
I’ve looked at whether this is generally a good idea in Should you use your pension to pay your debts? but in this article I focus on people who are already in a Debt Management Plan (DMP).
This article is relevant for people who are over 55 (or approaching that age), who have a pension pot that they can access but have not yet bought an annuity.
A pension is safe in a DMP
A DMP is an informal arrangement between you and your creditors. There are no set rules and no concerns that your pension will have to be used to pay your creditors. Instead you have a new option – to use some or all of your pension to clear some or all of your debts.
Are your debts a long term problem?
Some DMPs are only expected to last a short while – until you find a new job, until your child care costs reduce etc.
If this is the case for you, then you probably shouldn’t think of taking money from your pension. You are going to be retired for many years, don’t choose something which seems convenient now but which will reduce your income in retirement.
Is your DMP going well?
Are interest and charges frozen on all the debts? Are you paying a monthly amount that will see the DMP end in a few years? If the answers are YES and YES, then it would be foolish to disturb this good DMP – let it continue and keep your pension intact.
If some of your creditors haven’t frozen interest, there is more urgency in trying to deal with them. But read What can I do when a creditor keeps adding interest as there may be other ways of solving this problem!
Also check out how much tax you would have to pay if take money from your pension, see below – there is no point in reducing your interest costs but end up paying the taxman instead!
If your DMP however is going on for many years, or doesn’t seem likely to ever end, then you should look at ways to speed this up.
Using some of your pension is one of these – it may seem like a great choice, letting the rest of your life carry on as it is and rescuing you from debt, but it has major disadvantages.
Four big disadvantages of using your pension
- You have to pay tax on the money you take out as though it is extra income – this may push you into a higher rate of tax so it may be a lot more than you are expecting, see the tables here.
- If you are getting any means-tested welfare benefits, then these may reduced if you take money from your pension to pay your debts, as this may be treated as “deprivation of capital”. This may sound bizarre but it is a real issue – if you are on benefits and you want to use your pension to repay debts then you need to take advice from Citizens Advice first, before you take the money from your pension.
- You are going to be retired for a long time. Don’t exchange a problem for a few years now for a shortage on income for decades when you retire.
- If you have a pension which is linked to your salary, to withdraw money from this you first have to convert it into a “defined contribution” pension. In doing this, you may get a very poor value for the conversion and you will be losing out on other future benefits such as inflation-linked rises in your pension and a pension for your wife or husband.
How to use your pension to clear debts in a DMP
If those four disadvantages don’t worry you (you aren’t on benefits, you are happy with the tax charge, your pension is large enough that you can “afford” to spend this money now) then you need to consider the practicalities of using your pension.
First talk to your pension provider about what your options are. Some may not let you move your pension into drawdown or withdraw part of your pension, – you may need to move your pension to a different provider. Find out what the costs are – some providers are charging per withdrawal, some limit the number of withdrawals you can make. Also find the timescales – from the moment you ask to withdraw some money, how long will it take?
Next would be a good time to talk to Pension Wise, the government service providing guidance on pensions – call 030 0330 1001. Even if you feel happy you know what you are doing, I really suggest having a phone interview with them. At Citizens Advice you could get face to face debt advice PLUS guidance on your pension.
If you have been on a DMP for a while your creditors may be happy to accept a Full and Final Settlement. The best way to propose one is probably to write to your creditors saying you are considering withdrawing money from your pension if they are prepared to accept £x,000 in full and final settlement of your debt. At this point you do not want to have withdrawn the money already – you will only do this for creditors that agree. Tell the creditor what the timescale will be if they accept your offer.
Is it difficult to run your own DMP?
Articles about credit ratings and defaults
Affordability claims in a DMP – a good idea!
D needham says
We are in a debt management programme I am paying sixty pounds a month my husband has a small pension .can the debt company take our pension
Sara (Debt Camel) says
Are you sure you are in a DMP, not an IVA – the answer could be different if you are in an IVA.
A DMP doesn’t have to change if your husband starts getting a pension – but this might be a good time to look again at your options? How much roughly do you owe? Are you renting or buying?
E williams says
A Debt Management company set up a payment plan with my creditors in which all interest stopped being added in 1999. They charged a one off fee for this and then withdrew and there has been no contact since. This plan continues to date although only two of the five original debts remain and any increase of the monthly payments has been negotiated directly with those creditors. I have recently (foolishly I know) signed up with a ppi claims company who have identified a store card claim relating to one of the debts that has been paid off, but have not been able to answer my query as to whether the interest that was stopped could be reclaimed if the ppi claim was successful . Also even though my two remaining debts are with different banks than the one to whom the claim relates , I have been told by the claims company that it is possible that any monies forthcoming could be offset against my ongoing unrelated debts . When I queried this their response was that “the lenders decide where the money goes”. Surely this is wrong ?
Sara (Debt Camel) says
You should NEVER use a claims company when there is an outstanding debt. It is possible any PPI refund will be used to clear the debt I am afraid and then you will still owe the claims company their high fee :(
Once the PPI business is sorted and you know what has happened, if you still owe any money to these remaining debt it may be well worth asking the current creditors to produce the CCA agreement for the debts because they are VERY old. See https://www.nationaldebtline.org/EW/factsheets/Pages/getting-information/credit-agreement-advice.aspx – if they cant produce this, you may be able to simply stop paying, National Debtline can talk this through with you. But it’s not worth bothering with this now until the PPI is resolved as that may clear the debts.
Surinder Notay says
Hi, my husband has a Time to Pay arrangement with HMRC. He is now thinking of taking his pension. If he were to take his pension via annuities, would the HMRC demand his whole pension pot? Do they have power to take it?
Thank you
Sara (Debt Camel) says
How long until his Time To Pay arrangement clears the tax debt?
Surinder Notay says
A long time! About 10 years. We are paying monthly.
Sara (Debt Camel) says
I think he should talk to a debt adviser about his whole situation. There may be other options that he should consider. he could go to his local Citizens Advice or phone National debtline on 0808 808 4000. But if the tax debt is from his business, Business Debtline may the best people to help: https://www.businessdebtline.org/
Garry says
I wish people would stop saying go to Pension Wise for guidance on pension, they will not say anymore than what is on the leaflet that they print, so save yourself a wasted journey.
Sara (Debt Camel) says
Thee is a lot of bad information around about pensions. PensionWise can’t tell you what to do, but they can explain what your options are. None of them may be what you would like, but it’s good to know the facts.
Tina says
I am with DMP can they take a pension lumpsum to pay off the debt
Sara (Debt Camel) says
No, the money will be paid to you.
How old are the debts in your DMP?
Sandra says
I have a debt management plan, due to mental health issues I have had to retire and take my pension, the pension automatically gives lump sum of 8,000, do I have to declare this to the company who set up my debt management plan as due to my mental health issues I don’t go out the house but would love to make the back garden nice so I can enjoy my retirement.
Sara (Debt Camel) says
do you mind saying how long the DMP has been running for? and what your monthly payments are? Will these be affordable when you are retired?
Sandra says
It’s been running for 6 months, I’m paying £6 per month as I was on reduced wages from work ( I had worked for the same company for 26 years) and finished on ill health retirement, i am going to do a reassessment because my pension has now come through, I am now also getting ESA and am In the support group and getting PIP on the lower rate of both, my monthly income is more than when I was originally assessed if you take into account the PIP but I really need it to help me. It’s all very confusing.
I am actually on a Token payment plan at the moment, not a debt management plan, this was put in place until my pension and benefits were sorted out as I only had £6 left over income . If you take into account 373.96 PIP i am now £221 a month better off. Will they take this all off me?
Thank you for any advice.
Sara (Debt Camel) says
are you buying or renting?
how large are the debts?
and who is your DMP firm?
Sandra says
I am renting I have no assets and no car, the debts are 16,000.
Sara (Debt Camel) says
is this social housing?
Sandra says
Private renting
Sara (Debt Camel) says
OK then several points
1) you do not legally have to give the 6k to your DMP firm
2) the DMP firm will do a review of your DMP annually or possibly sooner if they had it down to be reviewed earlier. So at that point they will find out that you have increased income.
3) As some of your income is PIP, you should point out that you need all that income for your extra costs because of your disability, whether that is getting taxis to outpatient appointments, help to do the housework or extra to spendon your heating bills as you will be at home all day and so less mobile. Those are just some of the common things I hear mentioned, it is up to you what will help you most, from food supplements to a membership at a local swimming pool.
4) as you are private renting, I don’t know how secure you think your tenancy is? It may be unwise to spend much on the garden if you may have to move out in a year or two. But that is your choice. You may want to think about what other items it would be good to purchase that will make your disability easier. A chair that is easy to get up from. A good mattress. etc
5) 8k is very unlikely to be enough to settle 16k of debts that have only defaulted in the last 6 months, so that is not an option.
6) at your DMP review, you also want taken into consideration the amount your energy bills will increase again in October – that is expected to be another 50%…
7) if the DMP firm says you need to increase your payments to an amount which is less than £75 a month, talk to them about whether a Debt Relief Order would be more suitable for you. Under no circumstances should you consider an IVA, so pay not attention to any social media adverts offering to wtrite off 80% of your debts.
Sandra says
Thank you so much for your help, I really appreciate it, it makes things so much clearer. Just one more thing, if I do end up with a debt relief order when they look at my bank statements will I get in to trouble for spending the 8,000.
Sara (Debt Camel) says
It depends what you spent the money on – if it was for things that you needed because of your disability (I suggested a mattress or a chair it is easy to stand up from) then that should be ok. Also you can have money in the bank when you go for a DRO – so you don’t have to spend it all. But yes, if you spend it all on the garden, if you get a DRO but you may get a Debt Relief Restriction Order – see https://debtcamel.co.uk/bankruptcy-restriction-order-bro/ but you not feel you care about that.
I am just suggesting that a DRO is something to talk to your DMP firm about – I can’t guess from what you have said if you would qualify.
Sandra says
Thank you again or all your help I really appreciate your advice