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Balancing your pension and debts

Balancing Your Pension And Debts

Not sure whether to prioritise your debt repayments or your pension contributions? Here’s our guide to balancing both your pension and debts

Should I save for my pension or pay off debt?

When you have outstanding bills that need paying and creditors calling, no-one would blame you for deprioritising your pension. Balancing pensions and debt isn’t always easy but the good news is that there’s no right or wrong way to handle it. In fact, it all comes down to your individual financial circumstances and personal priorities.

If you’re currently employed, for example, opting into your workplace pension might cut your disposable income but it’ll also mean you benefit from employer contributions and government tax relief. However, you might not want to invest any more money into your pension if you’re struggling to manage your debts or finding it tough to cover your essential living costs. In that situation, choosing to pause your pension and focus on debt repayment might be the best option for you.

What is The Pension Freedom?

The Pension Freedom is a scheme that allows you to take a lump sum out of your pension pot once you reach 55 years old. Introduced on 6th April 2015, this option only applies to defined contribution pensions – a pension that you pay into and that your employer may also pay towards. If you qualify, you can take 25% of the full value of your pension pot as a tax-free sum. You can take more than 25% if you wish but this will be subject to income tax.

Pension Freedom doesn’t apply to a defined benefit pension – typically one based on your final or career average salary – as you won’t have a pot to draw from. However, depending on your policy, you might be able to receive some of the income early.

Should I use my pension to pay off debt?

Thanks to Pension Freedom, you might be able to withdraw a lump sum and use it for paying off debt. This might be the best choice for you but not for everyone, so it’s important to take care and consider all your options before deciding to access your pension. Take time to consider whether the money will be more useful now or better saved for your retirement.

While retirement might still seem like a long way off, if you’re able to leave your pension untouched, it could earn more interest over time and leave you better off in the long run. Taking a lump sum out might also affect any benefits you currently receive. However, if you’re falling behind with your priority debts and it’s starting to impact your mental health, clearing the debt in one fell swoop might give you the freedom you need to start saving afresh.

What should I do if I’m struggling with debt management?

If your debt repayments are making you reconsider the amount you pay into your pension, it might be time to explore your debt management options. Depending on your situation, you can take steps yourself or look to seek professional debt advice. Creating a budget that includes both debt repayments and pension contributions (even if they’re small) can make a big difference when it comes to tackling your debt and safeguarding your future. Entering an informal debt management plan could also help or you may want to consider a more formal arrangement such as an IVA.

Looking to explore your options? Our team of friendly debt advisors are here to help. Send us a message today or give us a call on 0161 660 0411.

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Credit Score

Credit Score Pop Up Wording : An Individual Voluntary Arrangement (IVA) is a formal agreement with creditors to repay a portion of your debts over time, but it does have an impact on your credit score and it will be difficult to obtain further credit whilst on an IVA. Once an IVA is approved, it is recorded on your credit report and will typically remain there for six years from the date it starts.
However, it’s important to note this is the case for most debt solutions and your credit score will likely already have been affected by being in debt in the first place.
Once your IVA is complete you will get a fresh start to begin rebuilding your credit rating.

Fees

IVA costs are charged for the preparation of your proposal and the administration of the arrangement for the full term (usually 5 years) these costs are charged from the monthly contributions you make into the IVA and are not in addition. Costs will only be recovered on approval of your arrangement and once you commence making payments to it. The fees for preparation of the proposal to creditors and calling the meeting for creditors to vote on its approval are called nominees fees, the fees for running the arrangement once approved are called supervisors fees. There are also some expenses incurred in the running of the arrangement such as the registration fee and the statutory insurance that needs to be taken by law, these are called disbursements. For our arrangements, the total of all of these is £3,650 although this may be adjusted by creditors when they vote on whether to accept. No matter what the end total of costs come to, you can be rest assured that these will be taken from the monthly payment we agree with you.