SPECIAL FEATURE: Worries over pension pot debtors
This morning’s insolvency statistics show that individual insolvencies for the fourth quarter of 2014 have fallen. There were a total of 99,196 individual insolvencies in 2014, a 1.8% decrease compared to 2013. While this news is good, it is not as impressive as last year’s results which saw 2013 have a 17% decrease. This unfortunately shows the rate of insolvencies falling is lessening.
What this morning’s statistics have not shown is the potential threat to those in debt that have pension savings.
The expected changes to pensions which will come into effect in April 2015 may bring about an unexpected downside for people struggling with debt as banks may be able to access the money in a pension pot to settle debts, leaving people with little or no pension for their retirement.
The pension changes mean people will be able to access the money in their pension pot from the age of 55. This new access to money means that those wrestling with a debt problem and are of the age to withdraw from their pension pot may be tempted to withdraw early to pay off their debts.
However, whilst a survey by IVA.co.uk the online community and information hub revealed that 70% of people would not withdraw their pension early to settle debts, they may not have the choice. Recent high court decisions have created uncertainty about how people in formal debt solutions such as bankruptcy may be forced to release funds from their pensions.
This sadly marks a significant departure from the accepted treatment of pensions on bankruptcy, which previously was beyond the reach of a trustee in bankruptcy.
This could have a big effect on the other solutions available to those facing debt as the banks would favour bankruptcy as a means to get more of the money owed to them even though this would leave debtors with a daunting future in retirement.
Clarity on how the new rules will be applied will be welcomed from the Court of Appeal in coming months.
While it may be tempting to use a pension to pay off debts, it will impact those in debt even further and mean they will not have the savings needed in later life.
As a general rule I would advise if in debt you should look at all your other possible debt solutions that won’t impact your pension. The fact that people are living longer means everyone needs to be prepared with a healthy retirement income to live on.
If those in debt are being harassed by creditors there are plenty of options and places to seek help including the National Debtline or StepChange. The Government is also setting up a new service called Pension Wise to help people understand their choices once the changes come into force in 2015.