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 8260 585.