Is it possible to use part of my pension to pay loans, or to opt out of the pension scheme altogether for a few years until my loans are paid?

Question

I have so far worked in Singapore, Norway, and now in the UK. My knowledge about pension scheme in general is very limited. What I only know is that part of my gross salary goes to tax and part of it goes to pension, and so what goes into my bank account every month is less than my gross salary. So far I have understood that I can only have access to my pension once I retire; until then, there is almost nothing I can do about it, except that, e.g. in Singapore, it is possible to use the pension to pay for housing, and maybe a few other things, although I know very little about them. I know almost nothing about the pension scheme in Norway and the UK.

But it occurred to me recently that perhaps it would be good if there is a possibility for me to use my pension to pay existing loans. Maybe it is more relevant to ask about the UK system, since I am working in the UK now. Is it possible to use part of my pension to pay loans, or to opt out of the pension scheme altogether for a few years until my loans are paid? If this is possible, is this a common and wise approach to take?

Answer 1

Most employers will let you can opt out of making private pension contributions so you would have that money available now.

However, private pension contributions are tax-free, so if you are contributing £500 / month to the pension, you would not end up with £500 / month more in your bank account but maybe something more like half of that if you are a higher rate tax payer. For that reason it may be better to pay off the loans more slowly and keep the tax benefit on the pension contributions. Additionally your employer may well be matching part or all of your contributions which is a benefit you would lose if you took the money as salary instead.

You also should consider whether you have enough saved for retirement. There are calculators online that will let you plug in numbers to determine how much you need to be saving per month to end up with a retirement income of £x.

In terms of the money that is already in the fund, in the UK you cannot withdraw money from any pension fund until you are 55, and in some schemes there are higher age limits, eg 60 or 65, so it would depend on the scheme you are enrolled in.

Then, there are limits on how much you can withdraw and what you can do with the money, again some of these limits are generic tax law and some are scheme-specific rules - for example you may be able to take part of it as a lump sum but the remainder would usually be taken as an annuity. There's an overview on the generic rules here: http://www.hmrc.gov.uk/pensionschemes/take-pension.htm but you would need to check the specific rules for your scheme to find out what additional restrictions might apply.

In short, and bearing in mind I am not a financial advisor and this is not financial advice, it is unlikely to be possible under UK law to do what you are proposing, and even if it is possible (you are over 55, your scheme permits it) it is unlikely to be a good idea anyway.