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Can I Cash in My Pension and Use to Pay Off Debt? 2022

Cash In Pension To Pay Off Debt

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

The one word answer to this question is yes, you can use this amount to get rid of debts. However, it’s not that straightforward. 

If you’re looking to avail this option to return all that you owe, you must first understand your options and relevant dos and don’ts.

In this post, I’ll cover all you need to know about using pension for this purpose and answer some FAQs as well for further clarity.

Don’t worry, here’s what to do!

There are several debt solutions in the UK that can be used to improve your finances. Choosing the right way to tackle your debt could save you time and money, but the wrong one could cause even more harm

It’s always best to find out about all your options from a professional before you take action.

Fill out the 5 step form to get started. 

Cashing in My Pension to Pay Off Debt – is it Possible?

Yes, it is possible.

However, just because you’re getting a pension, doesn’t mean you’re eligible to avail this option. You are only eligible if: 

  1. You are aged 55 or more.
  1. You have a ‘Personal Pension’ or ‘Company Pension’ that you are no longer associated with/taking, or actively pay into.
  1. You can – at any time in the future – be employed and be able to continue work.

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Can I Cash in All Kinds of Pensions to Pay Off Debt?

In this section, I’ll talk about whether you can use all types of pensions to contribute to your repayments or not.

In general, ‘defined’ pensions are more commonly used to pay off debts.

However, there are two other kinds of pensions that I’ll discuss that are also used to repay loans, although less frequently.

The four following types of pensions can be used to contribute towards repayments.

  1. Contribution Pensions which are Defined – these may be, but are not limited to: Company, Personal, Stakeholder and Group Personal Pensions.
  1. Benefit Schemes that are Defined – these are categorized under the mandate of Private Sector and Public Sector Funded Salary Pensions that are Final.
  1. LGPS – Local Government Pension Schemes.
  1. The pensions that do not apply to the ‘State Old Age Pensions’.
can i cash in my pension to pay off debt

How Can You Repay Off Debt with Pensions? – Options to Consider

There are a couple of options available at your disposal, let me elaborate:

  1. The first option to consider is that you can take a 100% cash lump sum – out of which the first 25% is tax-free. However, the rest of it is taxed at the marginal tax rate that is applicable at the time you take it. 

Note, that the marginal tax rate can alternate in the future.

  1. Secondly, you can transfer your fund to a UK approved pension contract. This contract should be in a position to put you in control of your money.
  1. This control will allow you to access your money – however you want it, whenever you want it. This is basically the same as if you’re using a savings account in a bank.
  1. In the instance when you die; you are able to transfer your pensions in a scheme that allows you to pass 100% of the fund to your heirs. 

If you die before 75, the death benefits are paid with no tax involved. In the case you die after 75, the death benefits are taxed at the marginal rate, that of the heir.

Is It a Good Idea to Repay Your Debt with Your Pensions?

In general, whether or not it is a good idea to repay your loans with pensions is conditional.

In certain situations, taking out a lump sum and using it to contribute to repayment can be a good idea.

I’ll cover the specific situations and arrangements where it may be a good idea to repay debts with pensions.

However, do bear in mind that however good the situation may be, withdrawing money from your pensions as a lump sum may affect your financial situation adversely, in a number of ways.

The arrangements and situations where using pensions to contribute to repayment are as follows:

  1. Any cash from taking your whole pot in one go;
  1. Any cash taken in in bulks;
  1. An annuity;
  1. A drawdown fund that is flexi-access;

Try considering opting for these arrangements to repay your debts. 

Regardless of the arrangements; I would advise you to always look for the status of any possible debt arrangement before opting for the option

What Could Go Wrong? – 5 Things to Consider

Let’s cover the five most important things that you have to look out for if you’re looking to cash in your pension to repay your debt.

  1. Additional charges

If you’re willing to take out a lump sum before you retire, you may incur charges called “early encashment” charges.

Once you get to individual withdrawals, you may incur a fee every time you withdraw as well, which is bad.

  1. Redaction of benefits

If you were eligible for benefits such as Universal Credit, they may be reduced or even completely redacted in your case.

Taking a lump sum from your pension may definitely come at a price if it means that you lose any benefits you were eligible for.

You’re required by law to inform the DWP if you are getting any benefits and you decide to take a lump sum from your pension.

Losing your benefits can be very harsh, especially if you were planning to pass along the money from the benefits to your children.

  1. Incurring tax

As per the rules, around 25% of the lump sum you retrieve is not subject to task.

However, you are required to pay tax on the rest. If you take out a very big sum, you may be liable to pay much higher tax that you originally anticipated.

Taking money from your pension in large sums can make you liable to pay very high amounts of tax on the amount.

  1. The recycling rules

The recycling rules state that if you retrieve £30,000 or more, you could be liable for a tax charge of around 70%

  1. Your final salary

The last problem you have to consider is that if you’re on a financial salary scheme, converting it to a pension and cashing it in can possibly give you a very poor conversion rate.


Can creditors take my pension?
Yes. If you have an arrangement of the sort, your creditors may be allowed to take money from your pensions to contribute to your repayments.
Can I go to prison for debt?
No. You can’t go to prison in the UK for being unable to repay your debts. You can’t be jailed for not having the ability to repay your debts. However, it’s a possibility that you might be jailed if you commit fraud pertaining to your debt.
Can HMRC take your pension?
HMRC may make deductions in your pension if you’re not paying your tax bills. If this is the case, if you’re getting more than one pension, HMRC may repay your tax bill with money they take from one of your pensions.
When can I cash in my pension?
The rules introduced in April 2015 mention that you’re allowed to cash in your pension as a lump sum when you reach the age of 55. Previously, this wasn’t allowed, but specific instructions now allow you that choice.


If you’re receiving a pension from the government and you’re in debt, you should definitely learn about the relationship between pension and debt, and how you can use your pension to contribute to your payments.

This guide was designed to help you do just that.

If you need more financial advice, feel free to reach out!


Are you struggling with debt?
Are you struggling with debt?
  • Affordable repayments
  • Reduce pressure from people you owe money to
  • Stop interest and charges from soaring