More and more people are retiring with debts.
A Prudential study found that one in five UK citizens is expected to retire with an average debt of £33,900. Additionally, new research from more 2 life has revealed that unsecured debt amongst 55 to 74-year-olds rose by a third over the last four years – more than twice the national average.
And, research from L&C Mortgages has found that one in five retirees will still be paying back their mortgage after they stop work – equal to around three million people.
Being in debt at retirement can have an impact on your standard of living. It may reduce your disposable income if you have to continue to make payments to a mortgage, loan or credit cards. You could even end up with insufficient income in retirement.
Since new Pension Freedoms came into force in 2015, many people have chosen to use their tax-free cash to repay debts. But, is this a good idea? We look at the pros and cons.
Should I use my tax-free cash to repay debt?
If you’re thinking of using your tax-free pension cash to pay off debts, then you’re not alone. A new survey from Portafina has revealed that paying off debt is the most popular reason for retirees to take a lump sum when they stop working.
More than a third of people seeking advice on taking a tax-free lump sum were doing so to tackle ongoing debt, and over-55s took an average of £18,110 as a lump sum.
Considering that more and more people are entering retirement with debts, using your lump sum to repay debts might seem like a no-brainer. And, there are several situations where taking a tax-free lump sum to repay debts may be beneficial, including:
Disadvantages of using your tax-free cash to pay debts
While there are some situations where using a pension lump sum to repay debts can be suitable, there are various issues to bear in mind.
There may be other options available to you for dealing with your debts. For example, if you have a balance on a high-interest credit card, it may be more beneficial to transfer your balance to a 0% deal with another card provider. This will give you the opportunity to repay these debts without paying significant interest, leaving your pension fund intact.
Switching your mortgage could also help you to reduce the repayments on your debt. A remortgage may let you take advantage of reduced repayments while equity release might free up capital from your home to allow you to repay what you owe.
Alternatively, it may be better for you to use any non-pension savings or investments to repay debts. For example, if you have money in a cash ISA then it may well be earning a lower return than the interest rate you are paying on a credit card or personal loan. Here, it can make financial sense to use your savings to repay debts and leave your pension pot intact.
If you’re one of the increasing number of people who are taking debts into retirement, we can help. Whether you need advice on the best ways to clear your debts before you retire, or you’re approaching retirement and you’re not sure how to deal with your debts, get in touch. Email firstname.lastname@example.org or call 0116 240 7070.
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