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Can You Retire if You Are in Debt?


Can You Retire if You Are in Debt?

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The face of the debt crisis is undoubtedly young. There is no denying that those in their 20s and 30s are struggling with more debt than ever before to make ends meet. Student debt, rising house prices and increased cost of living are just a few of the causes of the debt problems facing today’s young people. However, this doesn’t mean that people in their 50s, 60s and beyond aren’t also affected.

The Situation

A study released this year asked 9,896 UK adults aged 45 and over about their personal debts. Their responses demonstrated that the amount that the average indebted retiree expects to owe has risen to almost £34,000.

Reports from the last few years had been suggesting that the amount of debt held by the average indebted pensioner had been decreasing from its peak in 2012. By 2016 it had decreased to just £18,800. However, in the last two years it has, once again, begun to grow.

The amount of debt held by pensioners in debt per year:

  • 2012: £38,000
  • 2013: £31,000
  • 2014: £24,800
  • 2015: £21,800
  • 2016: £18,800
  • 2017: £24,300
  • 2018: £34,000

Many British people are entering into their first years of retirement with additional costs of £285 a month. It is estimated it will take them at least 3 and half years, paying this high amount, in order to pay off their debts.

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Interestingly, however, the report also found that there was a decrease in the number of retirees who were in debt. The proportion of retirees who were in debt has ranged from 17% to 25% over the last 8 years, and this year that amount fell from its highest point, at 25% in 2017, to 19%.

This makes it clear that, as expected, relatively few people over 45-years-old are in debt, unlike the generation below. However, those that are, are indebted by large sums that are likely to cause serious problems for their retirement plans.

What is the cause of retirement debt?

Most debt held by retired adults in the UK is from mortgages and credit cards. In fact, 38% of pensioners are still paying off their mortgage and 53% have credit card debt. Only 18% had bank loans and overdrafts.

Some experts have suggested that this use of credit cards and left-over mortgages are a result of the 2008 Financial Crisis. Similar research across the pond has found that families in the US who are reaching retirement are more likely to have debt than any other generation, from 53% in 1998 to 68% in 2016.

There are also suggestions that buying homes later in life is a contributing factor. A couple who invest in a home in their 40s or even 50s, and who avoid the higher rates of 15-year mortgage payments, will still have repayments to make in their 60s and, possibly, even 70s.

It is worth noting that the report also found that 2018 retirees expected an income 10% higher than those in 2017. This could partially explain the higher amounts of debt as it is possible that those who have debts are comfortable using debt; not all debt is necessarily problem debt, after all. However, this attitude may also be unrealistic and can easily cause problems down the road. Retirement expenditure is at its highest during the earlier years of retirement. If those in debt are unprepared for this, they may find themselves struggling unexpectedly.

If you get yourself in this bind, don’t despair. There are plenty of things that can be done to help you. While it may not be advisable, it is possible to have debt and a pension.

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What can you do if you need help?

There are many different situations that may see you having debt once you retire. As mentioned above, debt is not inherently bad and if you just need a little bit of help to manage it, here are some tips to help you:

1. Prioritise your debts.

This means you need to make sure that any debts that will have serious consequences, such as losing your home or electricity, are dealt with first. You should also prioritise the debts that are costing you the most money. If you have yet to retire, try and set yourself the goal of paying off your most serious and most expensive debts before you set the date of your retirement.

2. Use a 0% interest card to freeze the interest on a high-interest debt.

This only works if you know you can pay off the total amount of debt in the time that the 0% offer is in place, but it can give you some breathing room to deal with it efficiently.

3. Make sure you are receiving all your benefits.

You’d be amazed how much help from the government goes unclaimed. This can include help with bills in winter to bus passes and free tv licenses. Don’t pay for things you don’t need to, and make sure you are getting as much pension as you are entitled to.

4. Budget

This may seem obvious, but not everyone takes budgeting seriously. It is wise to budget all throughout your pension, but it could be the difference between success and failure if you are also in debt.

5. Consider other ways to make money

Get a part-time job or take in a lodger. It doesn’t have to be forever, but you can earn up to £7,500 a year tax free from renting out a furnished room, so why not give your kids’ old rooms a better use? They’ll manage without them.

Debt solutions available 

If you are worried that your situation is considerably worse than a little budgeting could fix, there are debt solutions that can also work with a pension.

Depending on your circumstance, it is possible for an IVA to work on a pension income. This can be particularly beneficial for homeowners. While it can’t help to pay off the mortgage, it could be ideal for dealing with credit card debts while protecting your home. Your monthly income has to be greater than your expenditure, including any mortgages you may still be paying off, but it could allow you to reduce your payments and have any remaining debt written off after 6 years, allowing you to fully enjoy the rest of your retirement.

For general advice on your pension, check out The Pension Advisory Service, and for professional advice on your debt and to see if an IVA is right for you, contact us on 0808 2085 198.

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