With income from regular work stopping when we retire, being debt-free at this milestone is often a goal. However, it’s not always possible. Whether you still have a mortgage or credit cards, it can be worrying to enter retirement with debt still to your name. However, there are likely to still be many routes you can choose and still be financially secure.
If you find yourself in this position, you’re not alone. The fact that the first-ever retirement interest-only mortgage, that’s fixed for life, launched this year, highlights how many retirees are facing debt. With more people going to university, the average age of first-time buyers rising and pressure on wages, it’s likely to become a growing trend in the future. Recognising that you need to create a plan to either pay off the debt or meet repayments is the first step in building a financially secure retirement.
Understanding your debt
You can’t create a plan to get out of debt without first understanding it. You should take some time to assess what debts you have. This means what they are, such as a mortgage or loan, how much is outstanding, and what level of interest you’re paying. This is essential for calculating how the debt will affect your retirement income and the best way to pay off the debt.
For example, if you have a mortgage on a relatively low-interest rate, you may find that it makes more sense financially to continue making regular repayments rather than dipping into investments that are delivering steady returns. On the other hand, if you owe money on a high-interest credit card, it may be savvy to decumulate your investment portfolio to repay it as quickly as possible.
You essentially have two options when it comes to paying off debt:
Income: Whilst you may not be working in retirement, you’ll still be generating an income. This could come from the State Pension or pensions you’ve been paying into. With an understanding of what your debt obligations are, assessing your retirement income will allow you to see if you can continue to keep up with repayments. It is important to look at how debt will reduce your income and what this will mean for your retirement lifestyle.
Capital: The alternative option is to use capital to clear debt, either with a single repayment or over multiple withdrawals. Capital that may be used to pay off debt could include savings, an investment portfolio or property. Again, if you’ve been retirement and estate planning with these assets in mind, it’s crucial you weigh up the impact using them to repay debt will have on plans.
So, if you have debt at the point of retirement, what are your options? We highlight some of the choices you may have below, but it’s important to keep in mind that these aren’t suitable for everyone.
1. Withdraw a lump sum from your pension
If you’ve been paying into a Defined Contribution pension scheme, it can usually be accessed from the age of 55 (rising to 57 in 2028). You’re in control of when and how much withdrawals are. Crucially for those with debt, you can typically take up to 25% of your pension tax-free, which may help you clear debts as you enter retirement.
However, it’s important to remember that a pension is designed to provide you with an income for the rest of your life. Even taking a relatively small sum from a pension early on in retirement can have a significant impact over the long term. It’s vital that you look at how withdrawing a lump sum will affect your retirement income and your funding plans as this may affect the level of contributions allowable into your pension, seeking professional advice is essential.
2. Using your property
If you’ve paid off your mortgage, your home is likely to be one of the largest assets you own. Accessing the capital locked in your property may afford you the chance to clear debts. There are a number of ways to do this, including downsizing and using an Equity Release product. However, it’s a decision that’s likely to be irreversible and needs to be carefully considered.
Alternatively, if you still have some mortgage debt, an interest-only retirement mortgage may help. You’ll need to ensure you have a regular income to make the interest repayments consistently. You should also keep in mind that interest rates are low now but are likely to rise in the future. If the interest rate isn’t fixed, would you be able to cope with increased outgoings?
3. Continue to work in some way
More people are choosing to work beyond traditional retirement for a variety of reasons. Among those may be the opportunity to pay off outstanding debts quicker.
Continuing to work doesn’t have to mean staying in your current role. You may decide to cut down your hours, take advantage of working from home opportunities or freelance. As the workforce becomes more flexible you’re in a better position to create the work-life balance that you want whilst retaining some income from employment.
Speak to a financial adviser
Retirement should be a milestone that’s celebrated. But if you’re approaching retirement with debt you may have concerns. There’s no single way to solve the issue of debt in retirement, it will depend on your own goals and provisions. What works for one person, may not be right for you. Speaking to your financial adviser about your situation and concerns can lead to a plan that’s tailored to you. If you’re worried about debt in retirement, please contact us.
If you find yourself in a position where debt is having a serious impact on your life and future plans, it may be advisable for you to seek support from a debt advice organisation. It can be challenging to do so but it’s often the first step to tackling debt and can help set you on the right path. The Citizens Advide Bureau and charity Stepchange can act as a first point of contact for accessing advice.