Pension freedoms and debts

Key facts


think carefully

Think very carefully about whether you use your pension fund to pay off your debts or not. Take your time to decide. Making a hasty decision could mean that you lose a lot money because of the tax or benefit rules. Taking money from your pension pot now will reduce your income later in retirement and might reduce the amount of benefits, tax credits or financial support from your local council that you get in the future.

How much debt must I owe? There is no minimum or maximum level of debt.

What type of debt? Any kind of debt

How long will it last? This depends on how much money you take from your pension fund and how often you take it.

How it works

The rules governing defined contribution pensions, sometimes called ‘pension funds’ or ‘pension pots’, have changed. If you are 55 or over, you now have access to your pension fund. This affects many personal and workplace pensions, but not defined benefit pensions such as final salary schemes. If you are considering moving money from a final salary scheme pension or a defined benefit pension, get specialist pension advice from an independent financial adviser first.

See our fact sheet:

Pension freedoms and debts

If you have a defined contribution pension, you might be able to use some of your pension fund to deal with your debts. You can choose to take up to 25% as a single, tax-free, lump sum.

You can do this in five different ways:

  • buy an annuity;
  • get an adjustable income (called 'drawdown');
  • take cash in chunks;
  • cash in the whole pension fund in one go; and
  • mix any of the options.

You can also decide to leave your pension fund untouched. Creditors should not pressurise you to use your pension to pay off debts. Contact The Pensions Advisory Service on 0800 011 3797 for free, impartial information and guidance about your pension choices.

You may be able to get a Pension Advice Allowance of up to £500 from your pension fund to help pay for financial advice about your pension options. You will need to write to your pension provider to make the request. Not all pension providers will offer this. The allowance is paid directly to a regulated financial adviser. It is not given to you. You can get an allowance up to three times, but not more than once in any tax year.


  • Using the money in your pension fund might make it possible for you to deal with your debt in a way that otherwise you could not afford.
  • If a creditor issues a statutory demand and is threatening to make you bankrupt, you may prefer to use money from your pension to deal with this instead of trying other options, like offering a charge on your property.
  • You will not have to take out credit that you cannot afford to deal with your debt.


  • Taking money from your pension now will reduce the money you and your family can get from your pension fund later.
  • If you are getting any benefits or tax credits, or if you get financial support from your local council, you should inform the Department for Work and Pensions (DWP), HM Revenue & Customs or your local council of any money that you take from your pension fund, so that you are not overpaid. Your benefit may be reduced or stop once you have done this.
  • If you take money from your pension fund, the DWP, HM Revenue & Customs and the local council will consider whether you have spent the money to try to get more in benefits or tax credits later. If they decide that you have done so, you may be given less in benefit or tax credits than you would otherwise have received.
  • You may need to pay for advice about what option to take.
  • If you take money from your pension fund without getting advice, you could lose a lot of money.
  • Your pension provider may charge you a fee for leaving your pension early.
  • Taking a lump sum greater than the tax-free amount from your pension would mean that some of the money would be taken in tax.
  • If you take money from your personal pension, it may affect whether you are able to use some other options for dealing with your debts.
  • If you take money from your pension while you are in some other debt options, it may be taken off you.