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The New Pension Freedoms - An Opportunity to Tackle Debts?

Updated: 20th September 2016

Since April 2015, many people with pension funds have enjoyed enhanced options to enable access to cash lump sums. These changes were described as being “the most radical changes to pensions in almost a century”.

According to Hargreaves Lansdown, those affected by these changes might include anyone with a defined contribution pension (individual, group personal, or stakeholder), self-invested personal pensions (SIPPs), and some Additional Voluntary Contribution (AVC) schemes. In addition, some people with final salary schemes might be able to transfer funds out into personal pensions and then access them, though it has been reported that this is less likely to be possible for public sector workers.

Large numbers of people have since used these pension freedoms to repay debt. However, it’s not always clear whether the short-term benefit of this outweighs the long-term cost.

If you become able to access a pension lump sum, or you will be able to do so soon, should you consider tackling a personal debt problem in this way? Would accessing your pension cash be preferable to entering into a Scottish trust deed, sequestration or the debt arrangement scheme?

It’s abundantly clear that there are no right and wrong “one-size-fits-all” answers to these questions. If you’re thinking about withdrawing your pension cash for the purpose of repaying debts that are causing you difficulties, here are some subjects that you might wish to carefully consider:

  • Can you address your budget (your income, your expenditure, or a combination of both) today in an effective way that will enable you to start clearing your debts?

  • If you cannot sufficiently address your budget now (to make the repayment of your existing debts affordable) what negative consequences from non-payment are you likely to face and when?

  • Will you be swapping one major financial problem for another? By repaying debts using pension cash now, will you potentially leave yourself unable to fund a comfortable retirement later?

  • If you’re a homeowner, are you already relying upon your pension to repay your mortgage when you cease working? What will happen to you and your property if there isn’t enough pension cash left to do this?

  • If you’re a homeowner with plenty of equity, would you consider (now, or in the future) using an equity release type mortgage to access a cash lump-sum to repay debts?

  • Do you plan to trade down to a smaller home in the future? If so, would it be worth bringing that forwards to avoid having to release pension funds now?

  • Do you receive benefits that would stop being paid if you were to draw a large sum of money from your pension?

  • If you draw a lump sum from your pension, how much of that lump sum will you have to pay over in tax?
  • If you’re a member of an attractive final salary pension scheme, do the benefits of leaving that scheme to access cash truly outweigh the actual risks and costs associated with being in debt now?

  • Would it be better to put up with the temporary inconvenience, and restricted budget, that might be associated with instead entering a protected trust deed, debt arrangement scheme, or sequestration? How would that compare to the risk of being short of retirement income for many years (potentially several decades) in later life?

There are clearly a number of complex and interwoven issues related to using pension cash to tackle problem debts. Don’t take action, and don’t specifically refrain from taking action, on the basis of this article and the information contained in it. It’s not advice. It’s intended only to help people to start thinking through some of the consequences of the choices that might (or might not) be applicable to them when the April pension changes come into effect.

Here are some places from which you can get information and advice that will enable you to clarify and compare the full range of choices that you have:

  • Find out more about your pension options by contacting Pensionwise.

  • Contact a specialist “equity release” mortgage broker if releasing cash from your home might be an alternative option (this type of mortgages is only available if you’re 55 plus).

  • Contact Citizens Advice if you receive benefits (or expect to in the future) that might be compromised by withdrawing a pension lump sum.

  • Make sure that you have fully established your tax position before withdrawing cash from your pension funds. An accountant or IFA might be able to help you. For many people, the new pension freedoms will enable them to plan their retirement income and lifestyle in much more flexible ways. For others, however, this freedom also creates a risk of taking a short-term decision that’s subsequently regretted for many years (or even decades) afterwards. Good advice and thoughtful reflection are required before making any final decisions.

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