Using a £9,000 pension pot to clear credit card debt

[Iwannachangerealbad]

I have a small pot pension I can now access
of £9000. I’d like to take the money to pay off a credit card debt as seems no point in combining with others. what would this mean tax wise. I am still working and in higher tax bracket. Would half of it go on tax? Does it jeopardize taking my 25% tax free later when I do retire.

If you draw down the full £9k you may trigger rules that limit what you can contribute into your pension going toward. Best to seek advice from pension wise or other advisor.

I'm not a financial adviser, but my understanding is that if you withdraw the £9k tax free now, it will count as part of your 25% tax free. If the £9k is from a defined contribution pension and is more than 25% of your pension pot, you'll also trigger the Money Purchase Annual Allowance (MPAA) which limits how much you can put into your pension to £4k a year.

The way I’m reading it is that the entire pension pot is £9k, so they’d only get 25% tax free

As you're talking about taking part of your pension, you must be over 55 so you could get a free appointment with Money Helper - government advice service on pensions for over 50s

As you're talking about taking part of your pension, you must be over 55 so you could get a free appointment with Money Helper - government advice service on pensions for over 50s

Can you just draw on the £9k monthly and use that to pay the credit card?

Can you temporarily decrease your contributions to your main/current pension to free up cash for paying off the credit card?

I realise that higher earners use the pension contribution to avoid tax in the higher brackets but surely paying off the credit card should be a short term priority.

She won’t if it comes under the small pot rules..

25% would be tax free and she’d pay tax on the other 75%, but the MPAA would not be affected.

Small pension pots under £10,000 can be taken in full, don't trigger MPAA and don't usually count towards your 25% tax-free lump sum.

Google 'small pots pension rules'.

Can you transfer your existing credit card debt to an interest free one? It’s called a balance transfer card. It’s only a very small fee to transfer and you get an interest free period sometimes for up to 36 months. Then you can reset the monthly payment to clear the balance in the interest free period

At the end of the interest free period you can transfer again. I had to do this for medical debt, it was far cheaper than getting a loan. I paid about £500 in fees in total for effectively a £17k loan over 4 years

there’s a product fee for each card of about £80 and then you pay a small % of the amount you want to transfer on the card as a fee

An alternative if you would rather not draw on your pension

Not every card has the product fee. I just got a great deal on a Barclays balance transfer!

Amazing! They were a complete lifesaver for me when I was up shit creek!

All of my cards are on interest fee but have too much on CC and trying to get the debt down further. I want it to come down much faster!

Understandable, but is it really the best financial move for you?

I have just got a balance transfer card that will take my monthly payment from £150 to about £55 a month. It’s 0% interest for 36 months, so the extra £100 can be used to address other issues I have. In 3 years time I’ll have paid of £2,000 of the £5,500 debt. I’ll then get another 36 month card, and leave it at £55 a month - at the end of that one I’ll then just pay off the balance. Paying it in one lump sum isn’t always the best move

Nice if only £5500 in debt! My monthly outgoings are pretty crippling and unless I get this debt down it will get worse.. So I’m using the credit cards too much to get through the month.

That’s why you consolidate onto one long term 0% card, pay the minimum (Barclays is only 1% of the balance), and go from there!

If you paid £9k off the debt would your outgoings be manageable? It sounds like you’d still end up using your credit cards, in which case taking one of your pensions would have been a waste of time. You need to address the outgoings > income issue first.

Have you done all the usual things suggested in here? Second jobs, eBay/Vinted spare items, severe budgeting?

MPAA is now 10k.

Rarely a good idea.
If you are unable to live within your means when working, you will never be able to retire, when you will be on a lower income, and even lower of you spend your pension savings early.

I would say you want to give your finances a total overhaul. The debt free wannabe approach might be good for you.

ETA link: https://forums.moneysavingexpert.com/categories/debt-free-wannabe

If you’re in the higher tax bracket then you’d pay the higher tax rate on your pension too (apart from 25% which is tax free). By my calculation that means £2,700 in tax leaving you just £6,300. I’m no expert but you should find someone who is to check that before you withdraw it.

Depends on the answers to a few other questions. What is the interest rate on the card? How is your pension invested? What is your current income tax position? Do you have any cash savings? What is the rest of your retirement provision looking like? Does debt cause you anxiety?

If you cash in under the small pots rule, with a £9k value, £2,250 (25%) will be tax free, but £6,750 will be subject to income tax. If you have taxable income below £5,820 you will not pay any income tax on the remainder as it will fall within your personal allowance, however you will be subject to income tax at your marginal rate on the 75% (£6,750). So if you are a HRT payer, your £9k only actually pays out £6,300 with £2,700 being paid in tax. If this is you and you have a decent interest rate available on the debt, and can pay the balance off in a reasonably short space of time from your income or cash savings, I'd bear in mind the benefits of compounding returns and leave the pension alone.

The Small pots rule isn't such an amazing benefit unless you are likely to be hit by the MPAA which will only be relevant if you are taking flexi access drawdown and are likely to want to simultaneously contribute more than £10k in a tax year. If you're scrapping around to clear a credit card, I don't want to be too presumptuous but that probably isn't you.