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1 in 4 People Retire In Debt

Mature couple planning their monthly budget

Unlock Your Pension to Pay Off Debts

More people than ever are facing serious levels of debt when they reach retirement age. Release some money from your pension to pay off debts today.

A recent study by the well-known insurer and pension fund manager Prudential has shown that a quarter of those retiring this year will do so with outstanding debts – and that the average owed will be more than £24,000. One in ten will retire owing more than £100,000.

This is hardly the backdrop for the stress-free retirement that most of us dream of, particularly with pension funds in crisis and reporting multi-million pound deficits.

However, there is a neat solution. The poor performance of the pension funds alongside the greater freedoms brought about by the 2015 pension reforms mean that the smart move is to cash in pension to avoid debt for a financially secure retirement.

Mortgage payments

Unsurprisingly, the highest source of debt on retirement is outstanding mortgage payments, and nowhere is this more prevalent than within the nation’s capital. High house prices mean that the number of Londoners retiring with debt will be even higher, at 44%.

A key component of the problem is the interest-only mortgages that were so popular in the 1990s. These were sold on the basis that owners would set up their own endowment policies to repay the capital, or would bank on their property increasing in value such that they could downsize and pay off the loan.

Many of these are now maturing, and a study by the Financial Conduct Authority suggests that some 1.3 million homeowners will be facing a shortfall.

Other debts

While mortgage debt constitutes the largest proportion, it is by no means the only type of debt that is on the increase. The average household has non-mortgage debts of over £13,000, an increase of more than £4,000 in the last 18 months.

Probably the most significant of these is credit card debt, with more than half of those retiring in debt owing something on the plastic. The average credit card charges interest rates of around 15-20%, and some store cards charge significantly more.

It clearly makes sense to pay these off as quickly as possible, and is a perfect example of how money sitting in a pension fund earning a fraction as much can be released and put to better use.

Other debts include personal loans and finance agreements (eg for a car purchase). It is easy to assume that you have to keep paying these for the agreed duration of the loan, but sometimes it can make better financial sense to absorb any early repayment penalties into paying these off as soon as possible.

A peaceful retirement

Cashing in your pension to pay off debt makes financial sense, but there is another reason that goes beyond financial prudence, and that is the peace of mind that comes with being debt free.

We all dream of retirement as a time when we will be relieved from the stresses and strains of working life, when we can relax and spend our hard-earned money happily and without any pressure. Paying off those debts can be the first step towards the retirement of your dreams.

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