Where the money for a settlement can come from
A settlement needs a lump sum. Some sources are straightforward; others can cost more than the debt they clear.
Applies to: UK-wide
What to do now
- Cover priority bills and an emergency buffer first — Bill Prioritiser.
- Check how a lump sum affects benefits — benefits check.
- Get free advice before using a pension or borrowing.
Common sources
- Savings. Simple, but keep enough for emergencies so a broken boiler does not mean new debt.
- Redundancy pay. Make sure essentials and priority bills are covered until you have new income. Redundancy and debt.
- Inheritance. Often the largest one-off sum. If you are in a DRO, bankruptcy, IVA or trust deed, it may have to be reported and could belong to the arrangement.
- A gift from family or friends. Creditors often accept less when the money is clearly a one-off from someone else. Agree in writing whether it is a gift or a loan.
- Selling an asset — a second car, jewellery or other valuables.
- Compensation or refunds, such as a complaint payout or tax rebate.
Pension lump sums
From age 55 (rising to 57 from April 2028) many people can take money from a defined contribution pension, usually with up to a quarter tax-free and the rest taxed as income. This permanently reduces retirement income. Be wary of anyone offering to release a pension early — it is a common scam. MoneyHelper’s free Pension Wise service explains the options.
Borrowing to settle
Borrowing to settle swaps one debt for another. A secured loan or remortgage turns unsecured debt into debt secured on your home, so falling behind could put the home at risk. A consolidation loan only helps if the settlements are much lower than the loan and you can afford the repayments. Debt consolidation.
Benefits and lump sums
Money you hold counts as capital for means-tested benefits. For Universal Credit, savings over £6,000 reduce your award, and with more than £16,000 you usually cannot get it. Using a lump sum on reasonable debt repayment is generally different from deliberately giving money away to claim more, which can be treated as if you still had it. Check with a benefits adviser before deciding.
Who to pay first
Priority debts such as council tax, rent or mortgage arrears and energy usually come before credit cards and loans, because the consequences of not paying are more serious. If several non-priority creditors are involved, sharing the lump sum fairly between them in proportion to what each is owed tends to get better results. Offer Pack.
If you are in a formal solution
In an IVA, bankruptcy, DRO or trust deed, windfalls are usually reported and may be claimed. A lump sum offered by a third party to end an IVA early is handled by the supervisor. IVA windfalls.
This page explains how the solution works. It is not a recommendation, and it cannot tell you whether it suits you — a free, regulated debt adviser can look at your full situation.
You never have to pay for debt advice. MoneyHelper (government-backed), StepChange, National Debtline and Citizens Advice all give free, confidential advice with no obligation.
Common questions
Can I use my pension to settle debts?
From age 55, rising to 57 from April 2028, many people can take pension money, usually with up to a quarter tax-free. It reduces retirement income and can affect benefits, so get free guidance first.
Should I borrow to make a full and final settlement?
Be careful. Borrowing replaces one debt with another, and borrowing secured on your home puts it at risk if you fall behind.
Will a lump sum affect my benefits?
It can. Savings count as capital for means-tested benefits; for Universal Credit, savings over £6,000 reduce the award, and above £16,000 you usually cannot get it.