Credit card debt and unpaid mortgages delay retirement

One in 10 men over 65 has an average debt of more than £50,000. Chiara Cavaglieri reports
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The Independent Online

Retiring in comfort is the dream for most of us, but one that is more difficult to reach, with one in five those approaching retirement this year with an average debt of £33,100, according to new research.

The Prudential survey found that for men over the age of 65, the situation is even bleaker, with one in 10 lumbered with debts over £50,000.

Money owed on credit cards is the biggest problem, with 55 per cent of those retiring in debt struggling to clear their bills, followed closely by 53 per cent who have not been able to pay off their mortgages in time.

"The current batch of over-55s are in a difficult position. Many are having children later who could still be at university and they may also have parents who are still alive, so they are sandwiched between two financially dependent generations," says Una Farrell of the Consumer Credit Counselling Service (CCCS).

The CCCS's figures show that of its clients aged over 55, the average unsecured debt is £25,826. When you combine this with the average income for over-55s of £12,920, it's easy to see how much of a sticky situation retirees could find themselves in.

"They have a lot of unsecured debt at a time when their income is declining and their earning potential is decreasing, so this issue really does need to be addressed," says Ms Farrell.

Free specialist debt advice is available from charities such as National Debtline and the CCCS which may be able to negotiate with creditors on your behalf, or an independent financial adviser (IFA) can help you to assess your retirement planning and manage your debts.

Delaying retirement is an obvious solution, not only because it gives you more time to pay off your debts and increase your cash flow upon entering retirement, but also because you will be in a position to build up a larger state and personal or occupational pension.

If this isn't an option, look to your property. Many people blame pensioner debt on baby-boomer's relaxed attitude to debt during the times of cheap credit. But the good news is that many of the people retiring with debt today also have considerable assets to fall back on. In particular, people can use their properties to raise cash, either by downsizing, or by taking out an equity-release product.

Generally speaking, downsizing is the cheapest option but some homeowners prefer an equity-release scheme. You either sell a portion of your home's value to an investment company at a discount, or take out a lifetime mortgage with the interest rolled up over the years until your death or the property is sold. This does mean that you can stop worrying about monthly repayments, but you are borrowing at an extremely expensive rate – typically between 6 and 7 per cent – and your children will lose out in terms of inheritance.

There is an argument that having a mortgage in retirement for anyone with equity in their home is not necessarily a bad thing. Equity release schemes are much costlier than conventional mortgages so retirees may decide there is little point aiming to clear their home loan before retirement only to be forced into releasing equity later when they run out of cash.

"Lenders want to see that you can meet payments, but that will be true of some pensioners and they will have made a conscious decision not to clear their mortgage debt," says David Hollingworth of mortgage broker London & Country. Where problems can arise is when lenders are reluctant to offer mortgages late into retirement. Many have an age cap of 75.

As well as using assets to clear debts, it is vital to get the best income possible when drawing on a private pension. This means taking the open market option and comparing annuity rates. Consider taking out a joint rather than single-life policy. The majority of annuities are bought by men and on a single life basis which means that the income stops if they die first.

Experts advise taking advantage of tax relief on pension contributions and using current low interest rates to reduce your mortgage. "If you have an interest-only mortgage you need to keep that under close review to make sure it is on target to repay the capital balance. If people are in a position to overpay that will erode the debt," says Mr Hollingworth.

It's also important to reassess your finances on a regular basis. "We all need to be realistic about how much money we need to have a financially secure retirement," says Jason Witcombe from IFA Evolve Financial Planning. "We need to be realistic about how much we spend while we are working because we are living beyond our means. Younger generations need to accept that they will be working well into their seventies."

Expert View

Jason Witcombe, Evolve Financial Planning

"If you have an outstanding mortgage balance but plan to downsize, that's not a problem. But if you have debt and no obvious assets to repay the loan with, this might be an issue. If you're concerned that your retirement income might not be sufficient to cover debt repayments and all of your other costs of living, then you should consider delaying retirement."

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