is it wise to use the 25 percent tax free from ones pension to pay off credit card debt.

Frodo65

Im currently earning less than my bills. Im currently planning to sell my house to buy cheaper one to clear debts. however whilst waiting for house sale im getting further into debt. Is it wise to use the 25percent tax free part of my pension plan to pay off some of the debt.

sammyjammy

No its not wise, its borrowing from your future self.  you clearly have other plans to sort out your finances so stick with those.

fatbelly

As above.

If you are wanting to move to somewhere smaller to save on maintenance, running costs, to get mortgage-free or because it's in another area that suits you better, that's fine.

But if not, then part 2 of your plan is not good either. You should not have to release equity to pay non-priority debts

RAS

It would really help if you could post a Statement of Affairs.

We can't tell from your post whether you can afford your essential household bills, but have additional debts which you can't cover, or whether you you can't afford even your basic living costs?

And raiding your pension is not a good idea in either case. You'd be better taking advice from a debt charity like Stepchange or National Debtline.

sourcrates

As above, its helpful for us to know the figures we are dealing with, the amount of debt you have, what your income/expenditure is, as there are always ways of dealing with these things.

Baron_Dale

I believe for one it is a personal decision. If you did use some of your tax free lump sum to pay off debts you could use monies saved from debt repayments to build up your savings for retirement. However you would still need to have a balanced budget from then on. If you manage to buy a cheaper house outright that leaves you mortgage free even better! 

It would be useful if you could provide some figures. How far away are you from retirement? What would your pension income be after the 25% tax fee portion is used? Have you checked your state pension forecast? 

Best wishes 

MEM62

Frodo65 said:

Is it wise to use the 25percent tax free part of my pension plan to pay off some of the debt.

The short answer is no.  Your pension is there to provide an income when you are no longer working.  Your pension income will be less than your current earnings, so if you cannot survive on what you are earning now, you are already going to struggle in retirement.  Reducing that retirement income further would be madness.      

horsewithnoname

Frodo65 said:

Im currently earning less than my bills. Im currently planning to sell my house to buy cheaper one to clear debts. however whilst waiting for house sale im getting further into debt. Is it wise to use the 25percent tax free part of my pension plan to pay off some of the debt.

How long till you sell your house? If you can hang on, then don’t cash in your pension. Only you know the figures and how it will pan out

Baron_Dale

horsewithnoname said:

Frodo65 said:

Im currently earning less than my bills. Im currently planning to sell my house to buy cheaper one to clear debts. however whilst waiting for house sale im getting further into debt. Is it wise to use the 25percent tax free part of my pension plan to pay off some of the debt.

How long till you sell your house? If you can hang on, then don’t cash in your pension. Only you know the figures and how it will pan out

  I do not believe the OP is considering cashing in his/her whole pension but using some or all of the tax free element.

DebtSurfer

From my point of view, the decision depends on what the OP calls "bills" and where these "bills" come from.

1. If we are talking about the "real" bills -- that is, payments for what sustains our life -- mortgage/rent, energy, water, telephone/internet, insurance plus food, transport, clothing, etc -- and even these could not be paid with the OP's current earnings -- that's one thing.
2. If we are talking about the real bills PLUS the repayment towards debts -- that is completely another.

If there is a case 1 -- this is unsustainable, the income must come up somehow or expenses come down, or better, both should happen. Paying partial debt off by 25% lump sum from the pension pot is not going resolve the problem permanently.

However if there is case 2 -- the earnings is insufficient only because of repayments towards debts -- getting 25% lump sum may help the OP to get out of debts. If there is enough resolve to abstain from whatever put the OP into debt -- they can continue life free of debt.
___________________

I have a classical situation "2".

I am very good with managing my money, not a gambler or splasher, just via a series of adverse events in my life (mostly being without work and having to look after a sick wife) I have accumulated significant debt. Then she went shopaholic and added another £11k to my debt.

My salary is good, without debt looming over me I'd now have hundreds of thousands on my account. Regretfully the debt prevents that. I managed to pay off a car loan (£14k) and a debt consolidation loan (£25k), now almost have killed a persistent overdraft (£6k) and started paying off my 4 credit cards plus wife's 2 credit cards, but with current economy situation, interests on some of my credit cards have gone up as well as mortgage payments, so it's getting down slower than I wish and may take years to clean up.

However this autumn I'm turning 55, and will be eligible to grab a tax-free 1/4 of my pension pot. It would be just enough to kill all my and wife's debts. I'd then be free to start murdering my mortgage and once done (3-4 years) I would be in a position to start building the safety cushion, savings and then investments. 

THE LOGIC WHY:

Yes, this money won't get to my pension pot.

But I'm currently wasting £700-750 per month in interest alone, plus mortgage interest is about £250 a month (these don't get towards capital repayment, it is now 4.19% instead of 1.19%...
What a waste, and how much I could redirect towards my real goals if I were debt-free NOW. Once I am, there is still tax-free ISA to accumulate money for retirement, and who can forbid to invest these money rather than keep it on a lacklustre account?

Alternatives in my case are for now grim.
* Of my credit card minimum payments, with increased rates, 50-60-more % of repayment is clawed back by new interest. Typical case of taking forever to pay off.
* I'd take a consolidation loan, but this is not a panacea. Only gives you less flexibility. With my current credit score, which took a dive when I maxed out my CCs to pay off the overdraft (40% APR!) -- pre-approval test says I'm practically unlikely to get one.
* There will be balance transfer offer on one of the cards, but for that at least £700-1000 has to be paid off on it, and I won't be able to pay off the entire balance of this card for 18 months.
* My salary has stagnated and career may never reach the next level, to be able to pay off things faster.

All pointed to 5-8 years of ruthless cutting off on everything, driving the same car, hardly even changing phones, basically long-term austerity on a family scale to get rid of debt when I'm probably approaching 65...

I think in my case 25% lump sum from my (consolidated) pension pot can provide all the difference between long years of my mid-50's, high-50's and low-60's devoid of all life pleasures -- and a decent life I deserve with my salary and persistence, in a developed country. 

Yes, there are rules against pension recycling, but I'll still pay maximum allowed, plus save on ISA/LISA/investment account -- to recover for monies lost in my pension account.

This is at least my current view on this problem -- I'm planning to open my own thread here to discuss my situation; I decided to answer as it seems that our situations are a bit alike.

enthusiasticsaver

Are you talking about cashing your pension in early or are you close to retirement anyway?  It depends very much on your circumstances but generally using your pension to pay off debts (although some use it to pay off a mortgage) is not a good idea.  The pension is there to provide an income for retirement so if you cash it in early you are jeopardising your ability to cover essentials in retirement.  This of course depends on how good a pension you have and what type.