For many people suffering from debt, an Individual Voluntary Arrangement can help them manage their money issues and relieve them of debt. While there are many benefits to taking out an IVA, it’s a legally binding agreement that you shouldn’t take lightly.
If you’re over 55, there are extra considerations to consider, including how an IVA might impact your pension.
In this short guide, we’ll explore if, when and how an IVA might affect your personal or occupational pension so you can decide whether this debt relief solution is right for you.
What’s The General Rule With an IVA?
An IVA usually lasts between 5-6 years, and your arrangement will consolidate all of your debts into one manageable monthly payment. During this time, you won’t have to deal with your creditors or worry about unexpected visits from bailiffs – as long as you keep up with the payment plan.
Once you complete the IVA and six years from the time it starts, you’ll be able to rebuild your credit file.
The most important thing you need to know about IVA’s is that they can help you free yourself of debt, but you do need to meet your monthly repayments, or your insolvency practitioner can end the arrangement. If this does happen, your creditors will have the right to chase payment, so it’s always a good idea to make sure you can commit to fulfilling your side of the agreement.
What About My Pension Plan?
In 2015, the pension rules changed, and people now have more flexibility over their retirement fund. When a person turns 55, they can access their entire pension or a portion of the fund. The general rule about pensions and IVA’s is that most have a written clause that your pension fund won’t be available to your creditors.
However, the change in rules can leave an element of ambiguity as to how an IVA might impact your pension. If you turn 55 while your IVA is active, you’ll need to discuss the situation with your insolvency practitioner.
A clause will already exist in most cases, or you can have one written into your arrangement that protects the fund.
Receiving Pension Payments When Your IVA Begins
In some cases, you might be receiving pension payments, which means they’ll count towards your income. Insolvency practitioners use this to work out an affordable monthly payment plan that leaves you enough to live on and pays off any credit card debt or other loans.
Some creditors might ask for your pension contributions to be reduced or even stopped during the length of your IVA, but a good insolvency practitioner will advocate on your behalf.
While many creditors want to clear your debt as soon as possible, they also understand and recognise that your pension is central to your retirement. Letting a professional handle negotiations means they’ll often broker a better arrangement that enables you to continue making contributions to your state and private pension.
Can Creditors Take My Pension?
In general, your pension is safe from creditors – especially with an IVA. All parties agree on a monthly payment amount, which doesn’t include money from your pension. As long as you meet your monthly IVA payments and let your IVA provider know if you’re struggling, you should be able to leave your pension until you reach retirement age.
Can I Use A Lump Sum From My Pension Pot to Pay Off an IVA?
For some people, access to their company pension or personal pension pot means they can use a lump sum to finance a house move, going into care or even pay off their debts. If you want to use your pension to pay off your IVA, this is known as a ‘full and final offer’.
It means that you can end the agreement early, and while it means you can free yourself of debt, there are still some things to consider.
What About When Retirement?
If you depend on your personal or occupational pension contributions for your retirement, it’s essential to consider whether using the fund to pay off your IVA is the best option. People save all of their lives to enjoy their retirement, which is a big drawback of making a full and final offer.
We recommend you take time to evaluate your finances and look at how your decision might impact your retirement.
How a Full and Final Settlement Might Impact Your Finances
When you withdraw a lump sum from your pension, it’s usually tax-free up to a certain amount. But in some cases, you might have to pay tax, which can impact your finances for the foreseeable future. Benefit recipients can also have their monthly payments reduced, but this depends on your personal circumstances.
Things to Consider
In general, Individual Voluntary Arrangements are an excellent way to pay off your debts, and many people have found them to be the most effective solution. However, entering into one isn’t a decision you should take lightly.
Here are some important things you should consider before making a final decision.
Could My Pension Be Classed As A Windfall?
If you have access to your pension, then using a portion of it to settle your IVA can be beneficial if you struggle to make monthly payments – or want to free yourself of debt. However, it’s vital to check if your IVA has a pension clause included.
Accessing your pension fund without an agreement means that your creditors can view your pension as a windfall and demand full payment of any outstanding debts.
It’s always best to check with your insolvency practitioner before making any decisions because you might not know your arrangement has a pension clause.
Failing to Make Your Monthly Payments
When your insolvency practitioner drafts an IVA proposal, you and your creditors will agree on one affordable monthly payment that factors in your regular income and living costs. If you fail to pay the minimum amount each month, your insolvency practitioner might decide to stop the IVA payment agreement.
You can request a pause in your payments in most cases, but you’ll need to prove that you cannot meet the IVA’s terms. If your creditors agree, you can get your finances back on track, then resume the agreement.
Would You Like to Explore Your Options?
At IVA Advice, we specialise in brokering Individual Voluntary Arrangements between debtors and creditors. Our dedicated team can help you to relieve yourself of debt without compromising your pension savings.
We work with people from all backgrounds, so whatever your personal circumstances are, we’re confident our financial advisors can help.
Contact us today for free debt advice, and we’ll be happy to discuss how an IVA might impact your credit score, how much your regular payments might be and answer any questions about how our independent service can benefit you.