Pensions and Debt

A pension is there to ensure you’ve got some financial support available later in life once you retire. If you’re currently in debt, we understand that you might be worried about your finances and even wondering whether you can use your pension to pay off debt.

To help you make a more informed decision on what to do with your pot of savings, especially if you’re currently struggling with your finances, we’ve created this guide on pensions and debt. In this guide, we’ll go through:

•    What is a pension?

•    Can you use your pension to pay off debt?

•    Can creditors take your pension in the UK?

•    Where to get help with pensions and debt

This content is intended to be an impartial guide regarding pensions and debt, and the impact they can have on one another. Lowell Financial Ltd does not offer financial advice. You can find out more about the organisations you can contact in our guide on debt help and support.

What is a pension?

To put it simply, a pension is a saving scheme that involves you putting money aside for when you retire later in life. There are three different types of pensions in the UK: workplace pensions, personal pensions, and state pensions.

Below we’ll provide an overview of each of these pensions and how they work.

Workplace pension

You may also hear these referred to as company or occupational pensions. These are a type of pension offered by UK employers, which you should be automatically enrolled onto once you become employed.

As part of the scheme, both the employer and employee will contribute a minimum amount each month. It’s worth noting that the terms and conditions of your pension can vary slightly depending on your particular scheme.

As of April 2019, government law states that employees must contribute a minimum of 5% of their wage into their pension each month. Employers are also required to contribute a further minimum of 3%.

Personal pension

A personal pension, also known as a private pension, is a type of defined contribution pension that you can set up yourself. This means you’re in charge of choosing the pension provider and need to make the arrangements for contributions to be paid.

It’s worth mentioning that you can have both a personal pension and a workplace pension at the same time. However, personal pensions can also be an option if you’re unemployed and are looking to start saving before retirement.

Whatever you pay is invested by the provider to build up a pot of money for you to take out once you retire. Normally, you’ll be able to access this pot after you’re 55.

There are three different types of personal pensions, which are:

•    Standard personal pensions
•    Stakeholder pensions
•    SIPPS (Self-invested Personal Pensions)

For more information on this, you can check out MoneyHelper’s guide on personal pension plans.

State pension

State pension refers to the pension you’ll receive from the government once you reach the state retirement age. Currently, the maximum state pension for 23/24 provides up to £203.85 a week.

However, the exact amount you get will depend on a couple of other factors, such as having at least 10 qualifying years on your National Insurance record. There is an official GOV UK page on the new State Pensions which delves into eligibility requirements further.

Can you use your pension to pay off debt?

Yes, you can use your pension to pay off your debt.

As pensions are a pot of money for later in life, you’ll usually have to wait until you retire to access the funds. However, with certain personal or workplace pensions, you might be able to take out a lump sum of money when you turn 55.

For example, if you do take money from your pension, this means that there will be less available later on. Essentially, you’ll receive a lower monthly income from your pension once you do retire.

Before going ahead and using your pension to pay off your debt, you should seek expert advice to find out whether this is the best option for you or not. This is because taking money from your pension may help your current situation, but it may not be right in the long term. You can find out more about the organisations you can speak to for expert debt advice at the bottom of this guide.

Here at Lowell, supporting our customers on their journey to becoming debt-free with us is our top priority. That’s why we use our budget calculator tool to help set up a sustainable payment plan with Lowell based on your individual circumstances.

What is a pension loan?

Another alternative way to use your pension to pay off debt is through a ‘pension loan’.

In short, a pension loan refers to a way of borrowing money against the value of your pension fund. Essentially, it’s similar to a secured loan, which is a type of financial loan that uses your property or another valuable asset, such as your pension fund, as collateral.

To get a pension loan, you’ll need to agree on a payment plan with your lender, the person who is giving you the money. This will include terms regarding how much money you’ll pay them back each month and the time duration you have to do so.

As with any type of loan, it’s important to consider what this means for your financial situation and whether you can afford to do so. Whilst you might be struggling to keep up with debt payments, or even dealing with problem debt, taking a loan against your pension may not be the right option for you.

If you’re unsure about anything to do with pension loans, there are lots of independent organisations you can turn to for advice and guidance, such as MoneyHelper and StepChange.

Can creditors take your pension in the UK?

At Lowell, we know that dealing with debt can leave you feeling overwhelmed and concerned about your financial situation. You might then also be worried about whether your creditors, the people you owe, will be able to take your pension without your permission.

In most cases, the answer to this is no. However, there are exceptions depending on whether you have an arrangement to pay your debt through a debt solution. With certain arrangements, your creditors may be able to take money from your pension income or lump sums. We’ll delve further into how this varies depending different debt solutions below.

If you’re interested in finding out whether a debt solution may be right for you and how it could impact your pension, there are a number of organisations you can speak with that we mention at the bottom of this guide.

If you’ve got a Lowell debt and your circumstances change or you don’t think your current payment plan is working for you, please get in touch with our team so that we can take another look at your account further.

Bankruptcy and pensions

Generally, if you’ve been declared bankrupt, you can’t be forced to use money from your pension to pay your bankruptcy debts. However, there are specific situations where this isn’t the case, and money from your pension could be taken to pay back your debts.

For example, your pension may be at risk if you’ve made significant payments into your pension whilst not making debt payments. In this instance, the person who administers your bankruptcy could try to reclaim these payments to give to your creditors. Or, if your pension is not approved by HM Revenue & Customers, any savings you have in it won’t be protected.

If you’ve not been declared bankrupt but are considering applying, it’s important to find out how this might affect your pension. One way you can do this is by seeking expert advice from organisations such as those we mention at the end of this guide.

For more information about this particular debt solution, be sure to read our bankruptcy guide.

Sequestration and pensions

In Scotland, bankruptcy isn’t available. Instead, the legal process that writes off your debts is called ‘sequestration’. It’s worth noting that your pension pot is not classed as an asset. This means that, in most cases, your savings will be protected as long as they’re in an approved pension scheme.

However, similar to the way in which bankruptcy works, this may be at risk if you’ve made significant contributions to your pension in the period leading up to being sequestrated. To put it simply, it appears as though you were purposefully hiding the cash from your creditors.

Depending on your particular case, these most recent payments may be reversed, and the money could be given to your creditors.

Individual voluntary arrangements (IVAs) and pensions

In some cases, creditors will look at the money you currently have in a pension pot and use that information to decide whether to accept your IVA proposal or not.

That’s why it’s important to check the terms within your specific IVA proposal and what it says about pensions. We’ve got a separate guide all about IVAs and how they work if you’d like to find out more.

Debt management plans (DMPs) and pensions

Depending on your individual circumstances, you may be able to take out money from your pension to help put towards a debt management plan.

You could do this by either taking out enough money to pay off all of your debts in full or paying a higher amount on a monthly basis with the end goal of clearing the balance in less time. For more detailed information, be sure to read our dedicated guide to debt management plans.

Debt relief orders (DROs) and pensions

When it comes to debt relief orders, you’ll need to make sure that you’ve already claimed any pensions in your name. This is because any unclaimed pensions might mean you’re not eligible to apply for a debt relief order.

If you’d like to find out more, you can check out our DRO guide which includes information on eligibility requirements and how they work.

Where to get help with pensions and debt

If you’ve got any questions or concerns related to your pension and debt, there are lots of places to turn for support.

Sponsored by the Department for Work and Pensions, the Money and Pensions Service, sometimes shortened to MaPS, work with MoneyHelper to offer free and impartial advice to people across the UK. Whether you prefer to chat over the phone or online, you can contact them via a method that is comfortable for you.

If you’re a Lowell customer, we won’t be able to offer any guidance ourselves, but we can put you in touch with other independent organisations who will be able to help. If you have any concerns or questions about your Lowell debt specifically, please don’t hesitate to get in touch. Our customers are our top priority, and we want to do all we can to support you on your journey to becoming debt-free with us.

You can also manage your account independently through our online payment portal, if you prefer. Alternatively, we’ve got a mobile app where you can view your Lowell account history, make debt payments, and access your credit score for free.

For more helpful guides like this on a range of debt-related topics, along with information about how we can work here at Lowell, be sure to take a look at the rest of our Debt Guidance Hub


First Published: 3rd June 2024