Using "pension" to pay off debts

Rache_2

We've just had a thought. Obviously we will be carrying on living within our means, now that we've seen the error of our ways....

But:

my H has some ISAs (share based, not a tracker fund) which he had earmarked to use as income in his retirement in lieu of a pension fund (he's self employed).

They have lost £2k of the book value (what they were bought at) but this wasn't an issue as they were bought for long term capital growth.

We could use some of it to pay off our debts. H is anxious as it means he'll have less in his "pension pot", and we'd need to reaccumulate this money. But theoretically it makes sense to use it to pay off our debts, thus freeing up some of our income which instead of going on debt repayments can go back into the "long term growth" savings pot.

Or does it? Advice welcome.

IN_LIKE_EVERYONE_ELSE!

Pension funds have been robbed and plundered left right and center, pay off your debts and sleep soundly.

Xbigman

It makes sense to do this because in absolute terms you will pay out less of your total income over your working life. The danger is that the money will not get paid back in. My advice is to set yourself a budget and see if you can stick to it for three months. At the end of the three months revue your budget and set yourself some targets. IE. Target debt reduction year by year, then savings targets year by year.
I don't know if it is significant for you but three months takes you into the new tax year.
Regards



X

Rache_2

Thanks both. This is the worry, of course, that we won't pay it back in.

We slept on it and I think we're veering towards plundering the pension pot. After all, because of our debts, in the next financial year we wouldn't have been using up our ISA allowances anyway, so this way, we have a chance to save enough that we could IYSWIM. What I mean is, if we pay off our debts with the pension money, then we have £x00 free per month to put back into an ISA, because we're not spending it on interest and debt repayments. I know we're lucky to have this, as it's not a pension as such, and can be plundered.

Our "lightbulb" moment was sufficiently shocking to make us quite determined never to live off credit again, and reading the Money Diet and (shhh) Alvin Hall's book has been very motivating in terms of trying to save for the medium and long terms. So I'm sure that we will put back that money over the next couple of years.

Thanks for the advice.

Rache_2

Anyone else?

Spendless

Have you asked on the pension board also? There are members of there who are pension managers/IFAs who don't ness come on this board who would possibly be able to give you more details on the pros and cons of doing this.

I

Thefunkygibbons

Is there a reason why he does not set up a pension scheme once you have done this, a stakeholder pension is allowed to have £236 a month without proof of income

Saving that much would stop you raiding it again

Sort out the debt and change the lifestyle

Rache_2

He has/We have never raided it before - in fact it has taken us nearly 2 weeks even to realise that it was there - he is so used to it being "untouchable".

He has been using share based ISAs for his pension long before stakeholders were introduced; I think we will take advice after this as to whether or not he should open a stakeholder or carry on using his ISA allowance. I think being self employed with a sporadic income means that though (until now) he has never touched his "pot", but just having the option to cash it in was a comfort. Whereas of course, the stakeholder doesn't have that option at all.

EdInvestor

Rache wrote:

He has been using share based ISAs for his pension long before stakeholders were introduced; I think we will take advice after this as to whether or not he should open a stakeholder or carry on using his ISA allowance.

Using the ISA is more sensible if you are a self employed basic rate taxpayer: this was a wise decision.

I think being self employed with a sporadic income means that though (until now) he has never touched his "pot", but just having the option to cash it in was a comfort. Whereas of course, the stakeholder doesn't have that option at all.

Quite so.

It is usually not sensible to save/invest while you are paying down debt, as you will pay more interest on the debt than you get on the investment. So unless he has been receiving very high returns he would probably be best to pay off the debt with the ISA money and then start saving again.

One other thing: it is very cheap for a self employed person to obtain a basic state pension - less than a tenner a week these days for voluntary NICs.Does he pay into that? If he doesn't, it might be wise to bring that up to date with some of the money first - you can pay up to six years in arrears. The state pension is a very good investment, well worth having - it would cost you nearly 100k to buy an annuity paying that income on the open market today.

Rache_2

Ed Investor - thank you for a very useful post.

1) he has been a higher rate taxpayer in the past but for the past couple of years is only basic rate. If his income returns to higher rate, we will be more inclined to go for a stakeholder, I think.

2) Such a useful way to look at the state pension (in terms of what an annuity would cost) - thank you! we will definitely consider this.

I think we are both agreed that the way to go is to pay our debts by cashing in the ISAs. It is with reluctance, but of course the more we think about it the more we know it's the sensible thing to do long term. Once we have organised our budget and decided how much we have spare, we will make paying into our ISA allowances a priority for saving, to make up for having removed these funds. (After paying those extra NICs of course). Meanwhile, once I have a permanent job I will look at my own pension provision and see what's sensible to do in terms of additional contributions etc. to make up for the maternity leave and the gaps in my husband's pension planning.

THanks again.