Using A Pension Lump Sum To Pay Down Debt

Once a pension holder reaches 55 years old they have the option to take up to 25% of their pension fund tax free. Leaving a pension fund intact to continue to grow is the best option for most but there are circumstances when taking a lump sum can be a sensible option. One potential use of a tax-free pension lump sum is to repay debt. In this post, we review the key factors to consider.

It is vitally important not to rush any decision but to take the time to carefully consider all the options. 

Step 1

If the debt situation is serious, perhaps with the prospect of court action or repossession, it is important not to make snap decisions but to talk the situation through with a debt charity, citizens advice, or a Financial Adviser. A wrong decision could actually make a bad situation worse.

Step 2

If debts are already being managed via Individual Voluntary Arrangement (IVA’s) or Debt Management Plans (DMP’s) it is again important to seek debt advice. Creditors may have a claim on any funds accessed as a pension lump sum. State benefits may also be affected by taking a pension lump sum.

Step 3

If there is a more stable debt situation, perhaps with high levels of debt on credit or store cards, then the key issues to consider are

Alternative solutions.



Every situation is different and it is important to take advice from a suitably qualified and experienced adviser who can calculate and compare the impact on the value of a pension fund of each potential way forward. It could be using a tax free sum to take out a high level of interest payments is the right way forward. It could be there are alternative solutions. Either way, it is important to calculate the impact on retirement funds.

Finally, there is the tax position to consider. There are a number of lump sum/income options associated with pensions each with their own tax implications. 

An initial quick calculation may give the impression using a tax-free pension lump sum to pay down debt is an appropriate way forward but when the implications are considered the situation becomes much more complex. Remember it is not possible to take a tax free lump sum from a pension until the pension holder is 55 years old.

If you would like a confidential discussion around releasing some funds from your pension then please give us a call or complete the form below and we will call you back.


This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The past is not a guide to future performance. The value of investments can go down as well as up and you may not get back the full amount you invested. Tax and financial regulations can change. Any figures quoted above are correct at the date of publication.

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