Starting retirement debt free a financial priority for 1 in 10
One in ten people accessing their pension said they wanted funds to pay off debt, data from Royal London reveals.
The mutual insurer recorded the reasons from almost 8,000 customers requesting access to their pension and ‘paying off debt’ – for example credits cards and/or loans – was the third most popular reason.
The most popular reason was categorised as ‘lifestyle’ purposes, significant purchases such as paying for a child’s wedding, holiday, or new car, with three in five (63%) choosing this. This was followed by ‘retirement income’ (18%) and paying off debt (11%).
Those in debt may think that turning to their pension is a good – or the only – option. The current cost of living crisis has left many people struggling to cover everyday bills, and so for some people withdrawing money from their pension to clear debt may well be the right thing.
However, there are a number of reasons why taking money from your pension to pay off debt may not be the best option so it is worth taking time to consider.
Royal London offers guidance support to customers who request access to their pension to pay off debt, through phone calls, money guides and sign-posting to organisations, such as MoneyHelper and debt advice charities.
Sarah Pennells, consumer finance specialist at Royal London, said:
“How and when to take money from your pension is a big decision and it’s something most people think about very seriously. While most of us would love to retire debt free, that’s not the reality for everyone – especially when we’re in the middle of a cost of living crisis. However, whilst taking money from your pension to pay off your debts might seem like a good option, it’s not always the case.
“Our cost of living research showed that 12% of people were thinking of dipping into their long term savings such as a pension to cover the increased cost of living. We’d recommend that anyone worried about debts talks to a free to use debt advice charity such as StepChange or National Debtline, as there may be other ways of dealing with debts that don’t involve breaking into your pension and potentially running out of money later in life.”
What to consider if you’re 55 or over and thinking of taking money out of your pension to pay off debts:
- You can normally take up to 25% of your pension as tax-free cash, but the rest is taxable. This means you may end up with less money than you expected, as any tax owed will be taken off money you withdraw from your pension before you receive it.
- If you take out more money from your pension than the 25% tax-free cash sum, you may trigger a tax rule called the ‘money purchase annual allowance’. This limits the amount that you can pay into your pension every year to £4,000. This limit takes into account any contribution from your employer, if you have one, and tax relief from the government.
- If you take out a large lump sum or cash in your entire pension, you may be pushed into a higher tax bracket. For example, if you’re a basic-rate taxpayer, you may pay tax at the higher rate as a result of the withdrawal from your pension.
- You may leave yourself with less money to live on in your retirement. Depending on how much you take out of your pension, you could impact your standard of living in later life.
- If you are receiving state benefits, you may end up with a lower amount, or disqualify yourself entirely from receiving state help by taking money out of your pension.
Notes to Editors
- Data from Royal London’s pension servicing of 7,846 customers between January 1st – December 31st 2021. 888 (11%) customers requested access to their pension in order to pay off debt.
- Royal London’s cost of living research can be found here.
For further information please contact:
Neil Cameron, PR Manager
- Email: firstname.lastname@example.org
- Mob: 07919 171969
About Royal London
Royal London is the largest mutual life, pensions and investment company in the UK, with assets under management of £147 billion, 8.7 million policies in force and 4,232 employees. Figures quoted are as at 31 December 2022.
Learn more at royallondon.com
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