I contacted Royal London and asked if some of my pension could be released and I would repay whatever I took.
The answer was that no money could be issued until I turned 55 – I’m 54 next month. I only need a small amount to repay the loan.
Is it possible to borrow from a private pension? I have had to temporarily stop my monthly payments.
Pension Tap: Is It Ever Wise To Withdraw Money From Your Pension Before 55? (photo taken by model)
Scroll down to find out How to Ask Steve Yours pension question
Steve Webb replies: Many people will approach retirement and have pension savings sitting with debt.
It is therefore worth thinking about some of the issues surrounding using pension savings to pay off debts and what alternatives one might consider in that situation.
Let me stress at the outset that trying to access your pension before the normal minimum pension age, which is currently 55, is generally a very bad idea.
HMRC gives a tax break on pension savings to encourage people to lock in their money until at least age 55, so even if your pension company let you go on your money before that age, its This will result in severe tax penalties.
It didn’t matter if you said it was a loan and you were going to pay it back.
For those age 55 or older, as you will next year, using pension savings to pay off loans may sound tempting.
This can be especially true if loans carry high interest rates with them. But there are many reasons to exercise caution before taking a pension to pay off debt.
First, there may be better ways to handle your debts. If you are in serious debt you should speak to a free loan advisor (eg, the charity Stepchange: About Stepchange. The UK’s largest debt charity.) who may be able to suggest a better route.
Steve Webb: How to Ask Former Pensions Minister Questions About Your Retirement Savings Check Out the Box Below
In some cases, it may be possible to manage your debts so that there is less pressure on you to repay them, or it may be possible to obtain a debt relief order or use another method of canceling the loan.
This could mean that you were free from your debt and still had your pension savings intact.
Another reason to be careful about using your pension to pay off your debts is that you could end up paying very high taxes, even if you are 55 or older.
If you withdraw a large amount from your pension in one go, you are taxed on the entire amount as income for that year. This can put a huge dent in your pension.
Even if you can spread the withdrawals over two or more financial years, you may end up paying very little tax overall.
A third consideration would be how taking pension cash might affect your ability to recoup your pension in the future, perhaps if your circumstances changed.
As we have covered earlier in this column, in most cases if you take the taxable ‘part’ of cash out of ‘pot of money’ pension, you can trigger a limit (‘Money Purchase Annual Allowance’) which That will restrict how much tax you can get relief in future.
An additional consideration would be whether you have other savings (like ISA) that can be used in preference to pension.
Especially for someone under the age of 55, an ISA is likely to be a better approach, and tapping into an ISA will protect your pension which will be an advantage if you think you may one day inherit tax. can come within the scope of.
Under current rules, money in a pension would be outside your estate for inheritance tax (and treated favorably for income tax purposes if you die under age 75), whereas money in an ISA would be outright. will be counted.
Returning to your specific situation, it may be worth talking to your creditor to see if paying off the loan in one year might be an option.
While other caveats still need to be taken into account, at least if you’re 55 you’ll be able to take pension money without the big tax penalty for ‘unauthorized payments’ on top of normal taxation.
I should add that if you talk to a loan advisor, you may find this process very helpful.
A debt advisor typically looks at your income to make sure you’re getting all the benefits and other help you deserve and looks at your expenses to see if there are ways you can improve your overall finances. Can save some money to improve. .
They will also look at your debts, liaise with creditors on your behalf and advise you on the best strategy to handle them.
Before making any decision about using my pension now or in the future to settle my debts, I would start right here.
.
