Mrs W is a 55-year-old woman who came to us with the aim of using her pension fund to clear her existing debt of £29,000, because she was having difficulty keeping up with her repayments and was looking for a solution. She was still wanting to continue to contribute to her pension fund, which meant that we could not use all the money in her pots under the new pension rules as this would decrease the amount of money she could keep putting in.
She had total pension benefits of £80,000 held within 3 pension pots. If we consolidated all three pots, the total value would be £80,000, and she would be able to take £20,000 of tax free cash (25% of pot) without affecting her ability to continue making pension contributions. Mrs W did not think that £20,000 was enough to pay off the debt to a level that was satisfactory.
We looked at alternative ways to manage the pension pots in order to maximise the lump sum Mrs W could have. We also needed to balance this with leaving a reasonable pension pot for the future and consider tax implications. The values of the three pension pots were £5,000, £8,000 and £67,000 respectively. Using the revised ‘small pot’ rules allows a person to take all of the money in a pot if it is under £10,000 (up to 3 times) and does not affect the ability to continue to contribute to a pension. Mrs W was able to take all of her money from her £5,000 and £8,000 pots. This gave her a sum of £11,050 after tax. Along with this, Mrs W was also able to take 25% tax free cash from the larger £67,000 pot, which gave her £16,750.
This, added to the small pot sums, gave her a total of £27,800 which enabled her to make a much larger dent in her debt. Mrs W was left with £1,200 of debt, which she confirmed was easily manageable and could be paid off quite quickly.
Mrs W was delighted with this outcome – she still had a nest egg for retirement, could continue to add to this, and she had paid off the majority of her debt and her month to month financial situation had improved greatly.