Can creditors take your pension?

Can creditors take your pension?

Money is tight for many UK residents right now. The cost-of-living crisis has seen various bills skyrocket, which has put a squeeze on finances. Yet this isn’t resulting in people only having to put luxury purchases to one side – it can also see them struggling to pay for everything from food to energy.

The result: people are finding themselves spiralling into debt.

If you are in the same position, you might be wondering what options are available to get out of this situation. If you have built up a sizeable pension pot, you might be wondering if this is a route you can take. Yet what if this isn’t a choice? Can creditors take your pensions to cover your debts?

When can a pension be claimed by creditors?

There are certain situations where it is possible for a creditor to claim your pension as a payment form. This is the case if an arrangement has been made between you and your creditors to pay off your debts. They can then complete payments by taking money directly from your pension pot.

There are various situations where pension-related money can be taken from your account. These situations include:

  • Money from a pension drawdown fund
  • Using a scheme or annuity pension (like a final salary pension)
  • Any lump sums taken out of your pension
  • The entire pension pot taken out in one go

Note that creditors can only take your pension when the pension becomes available as income. That is typically when you reach the minimum age where you’re able to access your pension, which is currently 55 years old (57 from 2028).

When is it not possible to use your pension to pay off debts?

As mentioned above, you need access to your pension to use this as a form of payment. There is also another situation where you cannot use your pension for debts: when you enter bankruptcy.

Bankruptcy is often an option for those struggling with large debts, and that is no different during the cost-of-living crisis. However, it is something that cannot be taken lightly, as it often comes along with numerous serious financial implications.

It is important to note most pensions are not classed as assets when entering bankruptcy.

When a trustee is appointed to help with your bankruptcy, the pension cannot be claimed as part of it. The situation is different, however, if you take out money from your pension. For instance, if you do take any lump sums, you could be asked by your trustee to use these to make payments towards your debts. They could even go to the extent of claiming entire lump sums if taken out during bankruptcy.

The issues with using your pension to pay off debt

It is always a stressful time when dealing with substantial debt. Sometimes you don’t know where to turn and your options can seem limited. However, it is highly recommended you avoid using your pension to pay off any debt.

If you do take money out to cover these debts, it is likely to have a negative impact on your long-term prospects. Firstly, it will leave you with a smaller pension pot. With the cost-of-living crisis and issues like inflation being experienced first-hand right now, you understand how bad it could be to have a smaller income in the future.

In addition, reducing your pension pot will impact your tax position – not just later on, but also in the present. You will get fewer benefits, which will ultimately handicap how much money is built up in your pension. In other words, it’s something you should think very carefully about.

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The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.


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