The question of whether to build up a pension or clear up the debts is a tough decision and people need more advice and guidance to make the right call – according to a new report. The report, entitled ‘Debt & Pensions Advice – Bridging the Advice Gap’ was a joint project between Money Advice Scotland and the Money Advice Liaison Group (MALG) and funded by the Money Advice Service.
The impact of Pension Freedom and auto-enrolment on a number of money people have available to repay their debts is explored in forensic detail by report author Nick Lord, who has more than 30 years experience in money advice and works with a range of commercial and not-for-profit advice organisations.
Lord said “If you decide to take money out of your pension to clear your debts now you won’t have that money available to give you a better income when you retire. If you worry about your debts and that makes you ill then taking money out of your pension makes sense. Saving through auto-enrolment means less money to repay debts. We need clarity around when people can save into a pension rather than repaying debt and when pension saving is to be ignored by lenders and debt collectors negotiating debt repayments.”
“It’s complex, confusing and people need better advice and guidance. Advisers need to make sure not to step over the boundaries between giving debt advice and guiding people making pension decisions.”
Craig Simmons Head of Debt Advice at the Money Advice Services said “It’s crucial that people get good advice when they present with debt problems along with pension considerations. This report highlights that, at present, this isn’t as straight forward as it could be for a lot of consumers and I thank Money Advice Liaison Group, Money Advice Scotland and Nick Lord for shining a light on this topic. The Money Advice Service, and the broader sector, should reflect on the report and consider how we can make advice as holistic and joined up as possible.”
The report indicates that:
- More clients and customers are able to access their pension savings after age 55
- More clients and customers will be automatically enrolled into a pension with increasing contributions
- At the same time, the level of individual and household debt continues to rise
- Therefore, more clients and customers will consider using their pension savings to repay debt or question how to allocate their income between repaying debt and contributing to pension savings
- Making an informed decision on whether to access the pension or contribute more to pension savings requires that the client/customer considers an often-complex interaction of various financial and personal factors
- Best practice and interpretation of FCA (Financial Conduct Authority) rules require that providers of debt advice take account of these new pension options when advising their clients or customers
- But most providers of debt advice are not authorised by the FCA to give advice on pensions, and existing information and guidance on pensions is likely to be insufficient to enable consumers with debt problems to make an informed decision
- FCA rules also imply or require that credit companies, mortgage lenders, and debt collection companies take account of the impact of Pension Freedom and automatic enrolment when discussing and determining affordability in debt collection and requests for new borrowing.