Debt in retirement: strategies for getting ahead of the problem

06 July 2023

Retired or approaching retirement and worried about the state of your finances? You’re not alone. Nearly one in five people retiring today will still have debts to clear, with an average sum of £33,900 being owed.

Credit card payments, personal loans, mortgages and overdrafts are among the most common sources of debt in retirement. However, there are ways to counteract these expenses and move into a healthier financial state.   

If you are looking for ways to clear or reduce your debt in retirement, here are three areas to consider.

1. Claim all the benefits you’re entitled to

According to Age UK - the UK’s largest charity working with older people - up to 1.9 million pensioners are living in poverty, with many failing to claim the benefits they are entitled to in their later years.

Some of the most common benefits claimed by retirees are briefly summarised below (we have included links to further information): 

• Some people don’t realise they won’t get their State pension automatically when they reach the appropriate age. Instead, you should receive a letter no later than two months before you reach State Pension age, telling you how to claim. If you don’t receive a letter, make sure you claim anyway. The gov.uk State Pension page tells you how.
   
• The State Pension age is changing, but you can check when you’ll be eligible with the gov.uk age checker. If you find that you have already reached the qualifying age but you are not receiving a State Pension (and have not previously chosen to defer receiving it) we would suggest you contact Citizens Advice for help.   

• You may also qualify for Pension Credit, if you are on a low income (currently less than £163 per week for single people and £248.80 for couples). This benefit is designed to top up your retirement income to a guaranteed minimum level. 

• Some retirees may qualify for support from their local authority in the form of Council Tax Reduction (also known as Council Tax Support). Qualification criteria differ for each local authority, so contact your local town hall for information.
  
  
• The Winter Fuel Payment is a tax-free sum of between £100 and £300 to help cover the cost of winter heating bills. You could qualify if you were born on or before 5 November 1953. 

As you approach the State Pension age, or if you have already retired, make sure that you are taking steps to arrange all the benefits you are entitled to. A good starting point is to use the Age UK benefits calculator to find out whether you qualify for benefits during your retirement. Your local Citizens Advice branch may also be able to help you check which benefits you are eligible for. 

2. Maximise the income you receive from your pension pot

If you’ve paid into a pension scheme to top up your State Pension income, you will at some point be able to access your pension pot. You might like to use this pot to purchase an annuity - a regular and guaranteed retirement income, payable for life.

Although there are other ways to use the funds in your pension pot, an annuity is the only way to secure a guaranteed income for life. You can also take up to 25% of the pension pot as a tax-free lump sum.

With an annuity, you’ll receive a series of payments made at regular intervals. The level of income you receive depends on many factors, including your age, location and your health and lifestyle.

Some consumers miss out on maximising the income they get from an annuity. They often don’t realise they may qualify for an enhanced annuity.

These pay up to 75% more income to people with any of over 1,500 different qualifying medical conditions or lifestyle factors. This is because annuity providers don’t expect people with qualifying health conditions or lifestyle factors to live as long as those with a clean bill of health.

Relevant factors can include relatively moderate matters like high cholesterol, smoking, alcohol consumption and weight outside of the ‘normal’ range.

More serious conditions such as cancer and heart disease are also taken into account. Even living within certain postcodes or having worked in some industries can qualify you for an enhanced annuity.

If you’d like to find out more about your annuity options, simply call us on 0800 652 1316. Our Annuity Specialists will be more than happy to answer any questions you might have. Alternatively, if you know the likely size of your pension pot you can use our annuity calculator to find out how much income it can generate.

3. Make the money in your home work for you

Your property is most likely your biggest investment and largest purchase in your working life. It makes sense to consider how this asset might help increase your finances post retirement, should you require additional income.

One option is downsizing. Moving to a smaller property, perhaps in a less expensive area, might allow you to access some of the equity from your home’s value to enhance your standard of living. Moving could also cut the cost of monthly outgoings, especially council tax, gas, electricity and water.

Alternatively, you could take on a lodger under the Rent a Room scheme to top up your monthly income. A lodger may also provide some company, decrease feelings of isolation and make you feel more secure in your home. There’s often no need to worry about the tax implications - you could generate up to £625 per month or £7,500 a year tax-free. 

4. Unlock money tied up in your home without having to move

If the above options aren’t suitable for your personal circumstances, you could choose to take out an equity release plan. Equity release can help to support you financially throughout your retirement by unlocking a portion of the cash tied up in your home. The cash you receive is tax-free and no monthly repayments are required.

The most popular type of equity release is a lifetime mortgage. This involves taking out a loan secured on your property while retaining ownership of your home. The loan amount and any interest accrued are paid back when you die or move into long-term care.

Once you’ve released the money you can do what you want with it, although it must first be used to pay off any outstanding mortgage on the property. Equity release is a lifetime commitment and there may be more suitable short-term solutions for your circumstances. Bear in mind also that taking equity release will reduce the inheritance you leave.

Choosing equity release isn’t a straightforward decision, so we recommend speaking to an expert. Retirement Line do not provide an equity release service. However, we can refer you to independent equity release specialists. Call us today on 0800 652 1352 to find out whether you qualify.

Equity release may involve a home reversion plan or lifetime mortgage which is secured against your property. To understand the features and risks, please ask for a personalised illustration.

Playing our part in boosting retirement income 

Would you like further information on the options available to you with regards to your pension pot? Are you considering purchasing an annuity?

As the UK’s largest annuity broker*, Retirement Line is well placed to help you shop around to find the best deal. We compare quotes from all the top annuity providers on your behalf, to help you get the best rate and the highest income for your retirement.

Call our team of specialists free on 0800 652 1316 and we’ll be more than happy to answer any questions you may have. Alternatively, you can email us at info@retirementline.co.uk.

 *Equifax Touchstone annuity sales figures 2018