Did you know that this week (11th September – 15th September 2023) is Pension Awareness Week?
What is Pension Awareness Week?
Held every year, Pension Awareness Week is a 5 day event which aims to empower Brits by offering them impartial pension advice. The week is hosted by Pensions Awareness Day who provide crucial help and support to those who need it.
This week, we wanted to shed some light on the troubles people may have contributing to a pension if in debt and offer options to those who repay their debts with a pension.
What is a pension?
A pension is a sum of money designed to offer an income to you once you retire.
When you retire, you will receive two types of pensions. A State pension is accessible when you reach retirement age (currently 66 years of age) and is an income offered by the government. This amount is currently £203.85 a week but can change. The amount you are entitled to in your state pension is depending on how many qualifying years you have on your national insurance record. Currently you’ll usually need at least 10 qualifying years on your National Insurance record to get any State Pension.
A pension scheme is a private pension pot you pay into which provides additional income alongside your State pension.
Paying into your pension scheme
There are various different types of pension schemes but the most common is known as a Defined Contributions pension in which you pay into a ‘pot’. The more you pay over your working life, the more income you will receive in retirement.
Most modern pensions also get paid into from your employer (often known as a workplace pension scheme). You and your employer combined must pay a minimum of 8% of your earnings into a pension scheme, with your employer’s minimum contributions set currently at 3%. Your payments are taken directly from your pay before it reaches your account, so is not something you need to account for in your budgeting (unless you contribute a set amount extra each month).
Both you and your employer can choose to contribute more and it would be advised to a) check the contributions your employer makes to ensure they are compliant and b) familiarise yourself with your contributions.
If you are in a position to do so, increasing your contributions even slightly can increase the pot of money you earn over your working life. You can decrease them again if you find yourself struggling.
Using your pension to clear debt
If you are struggling with your financial situation and have found yourself in debt, it is possible to pay off these debts by drawing on your pension.
However, this option should be considered very carefully as you may be putting yourself in a worse financial situation in the future. If you choose to use your pension pot to clear debt, first learn the kinds of contributions you make as this will likely impact the final outcome.
For example, if you have Defined Contributions, you will have less money in your pension pot and are therefore reducing the income you will receive when you retire. Drawing on Defined Contributions early may also limit how you use your pension when you retire.
For Defined Benefit pensions, for example final salary pensions, you don’t have a pot of money to draw from. Instead, you may be able to receive an income from that pension early to help with your debts. Your Defined Benefit pension may allow you to do this, but be aware that it may mean you have a lower income in the future as you are paid an income for a longer time.
You should also be aware that using your pension to pay debts will also have an impact on the benefits you may receive, how much tax you get and tax relief you are entitled to. Money Helper details further the impact of using your pension to pay debts, read it here.
Debt and the over 65s
The Independent Age charity has found that 1 in 7 Brits aged 65 or over are turning to loans and credit cards to help make ends meet during the cost of living crisis. Although it has been found that the older generations are usually more averse to using forms of credit, the rising cost of living has begun to change this.
For those reliant on their pensions to provide an income, they may be finding that this lump sum does not go as far as it did before. Unlike younger generations, those at retirement age may not be able to source additional income due to health or other reasons.
If this is the case for you or a loved one, why not visit our Benefits Calculator to see if you could be entitled to additional support from the government or your local council. For free, impartial advice on debts, use our online debt advice tool or speak with our advisors directly.