Debt Relief Dilemma: Is Your Pension the Answer?

It’s no secret that a growing number of people in Teesside are facing various financial challenges. Whether it’s trying to make ends meet on a day-to-day basis, coping with the rising cost of living or, the most daunting of all, managing personal debt that has built up over time. In fact, according to The Money Charity, the average total debt per UK household in December 2023 was £57, 586.

If this sounds familiar, you may see your pension funds as a quick fix to alleviate their debt burden. And yes, while accessing your pension can offer short-term relief, it’s important that you proceed with caution as there could be longer-term implications to doing so.

Given it’s Debt Awareness Week, in our latest blog, we explore whether tapping into your pension funds to settle debts is the right choice for you.

Top things to consider:

You can access your pensions from age 55

If you’re wondering how you can use your pension to pay off debt, the answer lies in Pension Freedoms.

Pension Freedoms were introduced in 2015 to allow people to flexibly access the money they saved into a Defined Contribution (DC) workplace pension. These freedoms give you more control over your pension savings, letting you access the money from age 55 onwards. You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum.

However, starting from 6^th April 2028, the age at which you can access your pension is planned to increase to 57. If you were born on or after 6^th April 1973, your minimum pension age could be pushed back to 57.

While this flexibility can offer benefits like financial independence (learn more in our Pension Freedoms blog), it also provides an opportunity to address debt.

You need to strike the right balance:

Many of you will have worked hard all your life, saving up money to enjoy your retirement years. And despite having built up a nest egg, more and more people are suffering from financial stress. According to finder.com, more than a third of adults are currently finding it very or somewhat difficult to afford their rent or mortgage payments. So, if you’re at the age where you can access your pension (55+), you may be tempted use your pension to manage your debts. However, before doing so, you need to consider the long-term consequences.

Pension funds are designed to support you financially during retirement. If you dip into these funds prematurely, you risk reducing the amount available for your retirement income. This could mean having less money to live on in the future. By prioritising debt repayment over retirement savings, you may find yourself facing financial hardship later on, unable to cover essential living expenses. Therefore, you need to find a balance of preserving your pension savings to maintain a comfortable standard of living throughout your retirement while being able to lower your debt.

Don’t forget the unexpected expenses:

Unexpected expenses can pop up out of nowhere and strain your finances, especially if you’ve used your pension to cover your debts. These expenses could be anything from medical bills to home or car repairs, or even losing your job unexpectedly.

If you’ve already dipped into your pension to pay off debts though, you may not have sufficient savings left to handle these surprises. As a result, you may need to borrow money again or use high-interest credit cards, undoing all the progress you’ve made.

So, it’s better to always be prepared for whatever expenses life throws at you by keeping some savings aside and exploring other financial safety nets.

Time may not be on your side:

Pension funds are typically invested to generate returns over time, helping your savings grow. When you take money out early to pay down your debts, you’re not just taking out the original amount you put in; you’re also taking away the chance for that money to increase in future value.

Withdrawing money early could hamper potential investment returns, further reducing your retirement fund.

With all this being said, using your pension funds to pay off debts can provide immediate relief from financial obligations such as credit card debt, loans, or outstanding bills. It can also reduce financial stress and improve your financial well-being in the short term.

However, whether this approach is suitable depends on individual circumstances and is not a decision to take lightly. You may want to consider alternative debt repayment strategies and, more importantly, seek professional guidance.

As trusted pension and retirement advisers in Teesside for over 20 years, we’re here to help you make informed decisions. We know that having debt can be stressful, but we also know that we can help you find the best option for you. For a no-cost one-on-one consultation, tap here to connect with one of our local experts.

Joslin Rhodes Pension & Retirement Planning – Real Advice, For Real People