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Should I use pension drawdown to pay off debt?

AHack16
Posts: 2 Newbie

Hi,
I'm a 55 and a new user here - and would v much appreciate advice on the merits of drawing down up to 25% of my pension to pay off debt.
I have approx £85K debt as a mixture of loans - with rates of approx 3% - and credit cards, currently on 0% rates from balance transfers).
I have a pension pot of approx £350K with Scottish Widows in a defined contribution company scheme.
I'm considering drawing down 25% of my pension to pay off debt by paying off the loans first and then credit cards as 0% rates expire.
Does this make sense?
How will affect my pension in future?
Thanks!
I'm a 55 and a new user here - and would v much appreciate advice on the merits of drawing down up to 25% of my pension to pay off debt.
I have approx £85K debt as a mixture of loans - with rates of approx 3% - and credit cards, currently on 0% rates from balance transfers).
I have a pension pot of approx £350K with Scottish Widows in a defined contribution company scheme.
I'm considering drawing down 25% of my pension to pay off debt by paying off the loans first and then credit cards as 0% rates expire.
Does this make sense?
How will affect my pension in future?
Thanks!
0
Comments
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In simple terms it will reduce what you have for retirement by 25%, although continuing contributions will reduce that %'age loss.
What other options / choices do you have?
Worth noting that the 3% on loans is lower than the likely return on investments.0 -
3% is a fairly low rate. What rate is your pension growing at? If your pension is growing faster than the debts it makes sense to delay.Also you probably do not need to take the 25% all at once. Just take enough for your needs.0
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I would pay off the loans gradually rather than in lump sum, especially the 0% debt, but that suits me as someone who manages debt quite well and doesn't panic with investment volatility. If you do have a bad history of debt management, or are prone to selling investment assets during market turbulence, then it might be better to pay off the loans.
Also, depending on what the debt utilisation is you might consider shifting the 3% debt to 0% debt as well.0 -
I'm considering drawing down 25% of my pension to pay off debt by paying off the loans first and then credit cards as 0% rates expire.So, looking at it another way, you are considering drawing against an investment earning around 5-6% a year on average to pay off debts that are costing you nothing to 3% a year.Does this make sense?It may do if the debts are not servicable but if they are then it would not make sense.How will affect my pension in future?Your retirement income will be reduced by a quarter for the rest of your life and you will pay more in tax in retirement.
You are effectively robbing your retirement years to pay for your working years. Your older self will not thank your younger self unless the debt is causing problems.
I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.2 -
I would pay off the loans.
Firstly, your net worth won’t change and what you have won’t be reduced when you do that.Secondly, a simple comparison between interest rates on loans and potential gains is bad maths. One is guaranteed, the other is unknown. Apples and pears.Thirdly, what you are doing now is called leveraging. You are multiplying your potential gains but also losses. That makes sense when one is young, Debt is poison when we approach retirement.Imagine a simple scenario: inflation goes up and then interest rates are forced up. Some of your loans will start costing more. At the exact same time investors start shifting from shares to bonds, so share prices drop by 50%. Your loss will be on 350K even though your net worth is 265K. So, it will drop by 175K (almost 70%) to 90K total.Losing 70% within 10 years of retirement is hard to recover from and psychologically challenging. Will you be able to sleep?2 -
Also you probably do not need to take the 25% all at once. Just take enough for your needs.
OP - If you wanted to go down this kind of compromise route i.e maybe paying some of the debt off but not all of it . Then firstly you need to check with your pension provider , if it is possible to take the 25% tax free cash in portions /at different times.
An older pension may not allow this , it might be all or nothing .
If so your current provider may suggest to transfer to one of the their own more modern pensions , or alternatively transfer to another provider ( which is easy ) ,
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dunstonh said:I'm considering drawing down 25% of my pension to pay off debt by paying off the loans first and then credit cards as 0% rates expire.So, looking at it another way, you are considering drawing against an investment earning around 5-6% a year on average to pay off debts that are costing you nothing to 3% a year.Does this make sense?It may do if the debts are not servicable but if they are then it would not make sense.How will affect my pension in future?Your retirement income will be reduced by a quarter for the rest of your life and you will pay more in tax in retirement.
You are effectively robbing your retirement years to pay for your working years. Your older self will not thank your younger self unless the debt is causing problems.
With £85k of debt owing I wouldn't roll the dice too often.3 -
Have you considered bankruptcy?That may well be a stupid question as you may have other assets worth more than £85k (e.g. a home), but your post didn't say so it's worth asking. Pensions are protected from bankruptcy (unless you try to exploit this) so drawing from pensions to pay off creditors can be a catastrophic mistake.If you have the means to pay the debts off and it's a question of "when" rather than "if" it becomes about return vs tolerance for risk as others have said.0
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Are you still employed? Are you still contributing to a pension??
I found out when I considered taking a portion of a DC pension for a previous employer that this would adversely affect my current pension in that I would have a much lower tax threshold for current contributions.
For a minimal gain (aka getting rid of a small amount of debt) I would need to pay at least an extra £400 a year in income tax as not all of my current pension contributions would be exempt from tax. This was sufficient enough for me to reconsider my plans and I've left the DC pension where it is until I'm ready to take the lot.I’m a Forum Ambassador and I support the Forum Team on Debt Free Wannabe and Old Style Money Saving boards. If you need any help on these boards, do let me know. Please note that Ambassadors are not moderators. Any posts you spot in breach of the Forum Rules should be reported via the report button, or by emailing forumteam@moneysavingexpert.com. All views are my own and not the official line of MoneySavingExpert.
"Never retract, never explain, never apologise; get things done and let them howl.” Nellie McClung0 -
Can you guarantee an investment that provides a 5%-6% pa return?Of course not. But equally it could be more.With £85k of debt owing I wouldn't roll the dice too often.£85k debt for a 55-year-old is not necessarily an issue. Many 55 year olds have far more debt than that and don't need to access their pensions. The key thing, which we do not know, is whether it is serviceable or not.
If the op has £85k debt and can comfortably clear it in their working life then there is no reason to access the pension.
The affordability/sustainability and severity of the debt and the consequences of the various options need to be considered.
I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.1
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