Worrying about loan and mortgage repayments on a limited income is hard enough, but for those of us approaching retirement, the stress can become all-consuming.
A recent report by Old Mutual revealed that 30% of retirees are still in debt as they enter retirement, despite only 17% of pre-retirees believing they would be.
Fortunately, there are ways we can responsibly minimise the pressures of debt in later life
The level of retiree debt
The Redefining Retirement report carried out by Old Mutual found that:
More than 1 in 5 retirees had mortgage debt when taking retirement, the largest reason for retirees to be in debt.
The average debt owed by retirees is £34,600
Almost 1 in 5 had debt of £50,000 or more, and almost 1 in 10 had debt of £100,000 or more.
Using your pension fund to reduce debt
As a result of the pension reforms of April 2015, over-55s can now access their pension funds, taking all of it in cash and prior to their retirement should they wish.
According to the Redefining Retirement report, the average amount of cash withdrawn by retirees from their pensions in the months following the pension reforms was £28,000 – with 19% of respondents stating that some or all of the money was being used to clear debts.
It goes without saying that it is wise to leave as much of your fund as possible untouched in order to provide a larger income in retirement. However, if looming debts are causing sleepless nights, you could perhaps use some of your tax-free allowance to resolve financial pressures before retirement.
Up to 25% of a pension fund can be taken as a tax-free lump sum, with any further withdrawals taxed at your highest marginal rate.
How much you withdraw from your fund depends on a number of factors such as how much cash you need as a lump sum now, your requirements for a future income, the amount of tax payable and if there are any restrictions in place by your current provider. Our Retirement Line specialist will be able to talk you through your options if you are thinking about doing this.
Tackling debt at retirement
If you are worried about entering retirement with spiralling debts, then tackling the problem sensibly is key. Before rushing to raid your pension fund, you might want to consider your other options first:
Budget It is vital to have a full understanding of your incomings and outgoings, so sit down and make a list or a spreadsheet of everything you bring in and exactly how much you spend each month on bills, groceries and any other financial commitments you have. Identify where you can cut spending and aim to pay more of your debt off.
Consider your savings If you have money put away for a rainy day then now could be the time to use it. Interest that accrues on debt is likely to far outstrip any interest you might be earning on your savings, and with less debt mounting up you could start saving again more quickly.
Arrange a balance transfer If the debt you have is on credit or store cards then you may be able to cut hundreds or even thousands off the cost of existing borrowing by carrying out a balance transfer. A number of balance transfer credit cards exist that enable you to pay off debts on old cards with your new one, so you owe the new card but with interest charged at a far lower rate - however, please be aware of the balance transfer fee. Some 0% deals are available for up to 40 months – take a look at the Money Saving Expert guide to the best deals.
Get a better rate Another option is to get a cheap personal loan by shopping around online. Do check there are no hidden early repayment fees on your existing loan first.
Switch mortgages If your major debt is a mortgage, then speak to an independent mortgage adviser to see if you can save money by switching to a better deal elsewhere. Again, you will need to consider if you will have any early repayment charges to pay on your existing mortgage.
Consider equity release If you are 55+ and own your own home, then a lifetime mortgage can be used to access the tax-free cash tied up in the value of your property without having to sell or make any monthly repayments. Equity release will reduce the value of your estate, so make sure you speak to an independent specialist before making a decision. This is a lifetime mortgage, to understand the features and risks please ask for a personalised illustration.
Speak to a debt adviser There are a number of organisations set up to help people deal with their debt. Options include arranging a Debt Management Plans for you to reduce the amount you have to pay each month. Contact debt charity Stepchange for advice.
Retirement Line Limited is Authorised and Regulated by the Financial Conduct Authority, FCA No. 726601. Retirement Line Limited is registered in England and Wales, registration No. 6976976. Registered Office: 52 Forder Way, Hampton, Peterborough, PE7 8JB