One in five people who expect to stop working in 2018 will do so saddled with an average of £33,900 in debt.
Research from Prudential shows that between 2017 and 2018, the average number of people entering retirement with overhanging debts has decreased. Unfortunately, the average amount owed by each has doubled over the past two years.
This comes at the same time as the Financial Conduct Authority (FCA) published their concerns about the upcoming rise in mortgage repayments, which could leave millions of people at risk of financial difficulty and losing their homes.
The issue
The FCA study shows that between 2027 and 2032, more low-income households will be facing the double-edged issue of entering retirement whilst still being responsible for the repayment of an interest-only mortgage.
Interest-only mortgages are repaid at the end of the term (usually 25 years), as you only repay the interest due on the full amount each month. However, the research has shown that many people are unaware of their options when the time comes to repay the full amount.
Whilst mortgages are a concern, Prudential’s research reveals that it is the second most common debt to take into retirement. The four most concerning debt types are:
• Credit cards (53%)
• Mortgages (38%)
• Overdrafts (18%)
• Bank loans (18%)
The outlook
For those entering retirement with debts, it could be huge drain on their income. The average pensioner repaying debts will face monthly bills of £285 for three years and six months.
But it isn’t so straightforward. The study shows that men are more likely to retire with debt. 22% do expect to make repayments into retirement, with an average debt of £43,600 per person. Meanwhile, 16% of women expect to be in debt when they retire, owing an average of £19,200 per person.
A few regional differences have also become apparent; 24% of people in the North West will retire with debts, while just 14% of people living in Wales face the same fate.
The answer
Taking debt in to retirement can be worrying and is almost guaranteed to make life harder, especially if you are retiring before the state pension kicks in.
So, how can you avoid taking debt in to retirement?
Try to repay it before you retire: We know this sounds obvious, but it is the first option to look at. The earlier you can start repaying debts, the easier it will be to reduce or remove them when you finish working.
Consider downsizing: Selling your current home and relocating to a cheaper property will give you extra capital to repay any debts you may have. You can even use it to pay off your interest-only loan, or at least make a significant dent in it.
Utilise your pension fund: As we discussed last month, the Pension Freedoms reforms give you more flexible access to your pension savings. It’s tempting to access a lump sum from your pension funds to ensure that you are debt-free when you retire. Currently, you can access your private pension funds from the age of 55, with 25% available as tax free lump sum.
However, taking money out of your pension to repay debt has two major issues:
The first, if you withdraw more than the 25% tax free lump sum, you may pay tax on the additional amount you take out. This could make it an expensive way of repaying debt.
Secondly, by repaying debt with your pension, the money will no longer be available to provide an income in retirement. Therefore, advice should be taken before withdrawing money from your pension.
Other savings and investments
Money you have put aside for a later date may have found its purpose. But remember, once you spend that money on repaying debts, you no longer have it available for emergencies. Try to ensure that your financial safety net is kept separate from any funds you put into debt repayment.
Financial planning
Remember, any money you take out of your pension now will mean that your income in later life is reduced. The key is to find a balance between repaying the debt to free up more income and managing your lifestyle later on.
The key is financial planning. Start planning your retirement as soon as you can and ensure that having all debt repaid by the time you do retire is part of that plan. A financial planner will be able to help you with this. They will work with you and your circumstances to determine the best way to use your current capital and income to solve any problems you might face when going into retirement.
If you are thinking about retirement planning (and you should be!), don’t forget the 7 things to do in the year before retirement.
If you are worried about debts and your income in retirement, now is the time to talk to us.
Contact Sarah or Bev on 0115 9338433.
