I'm nearly 54 and struggling - can I borrow some of my private pension to clear debts and then pay it back? Steve Webb replies

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I contacted Royal London asking if some of my pension could be released and I would repay what I take. 

The reply was no money can be released until I am 55 – I’m 54 next month. I only need a small amount to pay off a debt. 

Is it possible to borrow from a private pension? I have had to temporary cease monthly payments.

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Steve Webb replies: Many people will be approaching retirement and have pension savings sitting alongside debts. 

So it is worth thinking through some of the issues around using pension savings to pay off debts and what alternatives someone in that situation could consider.

I should stress at the outset however that it is generally a very bad idea to attempt to access your pension before the normal minimum pension age, which is currently 55. 

HMRC give tax breaks on pension saving to encourage people to lock up their money until they are at least 55, so even if your pension company did let you get at your money before that age this would result in serious tax penalties. 

It wouldn’t matter if you said it was a loan and you were going to pay it back.

For those aged 55 or over, as you will be next year, using pension savings to clear debts could look attractive. 

This could be particularly true if the debts carry with them a high rate of interest. But there are several reasons to be careful before tapping in to a pension in order to clear a debt.

First, there may be better ways of handling your debts. If you are in serious debt you should speak to a free debt adviser (for example, the charity Stepchange: About StepChange. The UK’s Largest Debt Charity. ) who might be able to suggest a better route. 

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In some cases, it may be possible to manage your debts so that you are under less pressure to pay them off, or it may be possible to get a Debt Relief Order or use some other way of getting the debts cancelled. 

Gallery: 30 truths retirees wish they had known beforehand (Espresso)

This could mean you were clear of your debts and still had your pension savings intact.

A second reason to be careful about using your pension to clear your debts is that you could pay a lot of tax, even if you are aged 55 or over. 

If you take a large amount from your pension in one go you are taxed on the whole amount as income in that year. This could make a big dent in your pension. 

Even if you could spread the withdrawals over two or more financial years you might pay a lot less tax overall.

A third consideration would be what impact taking pension cash now might have on your ability to build up your pensions again in future, perhaps if your circumstances changed. 

As we have covered in this column before, in most cases if you take taxable ‘chunks’ of cash from a ‘pot of money’ pension then you may trigger a limit (the ‘Money Purchase Annual Allowance’) which would restrict how much tax relief you could get in future.

An additional consideration would be whether you have other savings (eg Isas) which could be used in preference to pensions. 

Particularly for someone under 55, an Isa is likely to be a much better approach, and tapping into an Isa would protect your pension which would be an advantage if you thought you might fall within the inheritance tax net one day. 

Under current rules, money in a pension would be outside your estate for inheritance tax (and favourably treated for income tax purposes if you die under 75), whereas money in an Isa would be counted in full.

Returning to your specific situation, it might be worth talking to your creditor to see if clearing the debt in a year or so might be an option. 

Although the other caveats should still be born in mind, at least if you are aged 55 you would be able to take pension money without a big tax penalty for an ‘unauthorised payment’ on top of normal taxation.

I should add that if you do speak to a debt adviser, you may find the process very helpful. 

A debt adviser would normally look at your income, to make sure you are getting all the benefits and other help to which you are entitled and look at your expenditure to see if there are ways you could save a bit of money to improve your overall finances. 

They would also look at your debts, liaising with creditors on your behalf and advising you on the best strategy for handling them. 

Before making any decisions about using your pension now or in the future to tackle your debts, this is where I would start.

Ask Steve Webb a pension question

Former Pensions Minister Steve Webb is This Is Money’s Agony Uncle.

He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.

Steve left the Department of Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.

If you would like to ask Steve a question about pensions, please email him at pensionquestions@thisismoney.co.uk.

Steve will do his best to reply to your message in a forthcoming column, but he won’t be able to answer everyone or correspond privately with readers. Nothing in his replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.

If Steve is unable to answer your question, you can also contact The Pensions Advisory Service, a Government-backed organisation which gives free help to the public. TPAS can be found here and its number is 0800 011 3797.

Steve receives many questions about state pension forecasts and COPE – the Contracted Out Pension Equivalent. If you are writing to Steve on this topic, he responds to a typical reader question here. It includes links to Steve’s several earlier columns about state pension forecasts and contracting out, which might be helpful.  

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