Pay Off Your Debts Before Retirement
We all have visions for our retirement. It is a time when we can take a step back from the troubles of working lives, and do the things we have always dreamed of. Most people’s plans include spending more time with family, taking that long-overdue holiday or starting a new pastime such as golf or sailing.
We also see older age as a time when we no longer have to worry about money. Five out of six of us expect to retire without debt and assume that this will be a time when we can use our hard-earned savings to help children and grandchildren through their own financial challenges.
Sadly, the reality is different. Almost one in three people are still paying off debts when they reach retirement age, and one in ten owe more than £100,000. Mortgage debt is the most common, but others include credit cards, store cards and unsecured loans.
For those who have spent years ploughing money into a pension plan, there is, however, another option. Did you realise that you can cash in your pension to release equity? With pension funds in crisis, it makes increasing sense to use the money to pay off costly debts rather than leaving it invested and making negligible returns.
Using a tax-free pension release in this way makes financial sense and can be enormously liberating, providing the opportunity to spend retirement the way you planned.
Unlocking your pension is not a decision to be taken lightly and is one that should be taken on the basis of careful consideration and expert advice. But the inescapable fact is that pension funds as we know them are no longer effective in the new millennium, and for a growing proportion of people, it makes better financial sense to use the cash in other ways.
Can I pay off debts with my pension fund?
The answer is yes, although consumer surveys have shown that many people did not realise that they can release cash from their pension to retire debt-free.
However, pension freedom reforms have given thousands of people the opportunity to take control of their savings. Since the reforms came into force in April 2015, the average sum withdrawn has been £28,000 and one in five retirees has used at least some of that money to pay off debt.
What kinds of debt can I pay off?
Equity can be released to pay off any kind of personal debt. Some of the most common types are as follows:
Mortgage debt is by far the most common form of debt held at retirement, and also the least expected. More than 90% expect to have paid their mortgage off by the time they retire, yet in reality, more than 20% are still making mortgage payments when they reach retirement age.
However, other types of debt are also common, and are usually less easy to predict or control. The average household owes around £13,000 excluding mortgages.
Credit cards are the second most common source of debt. This is perhaps unsurprising, given the ease with which credit can be obtained today. Many people use credit cards for their everyday spending, but are not always able to clear the balance at the end of the month. The total credit card debt in the UK stands at over £66 billion. That’s almost £3,000 per household.
Those with significant credit card debts often rely on the interest free period, but once this is over, standard rates are typically between 15 and 20%. These levels of credit were last seen in 2007/08, and on that occasion it ended in tears for thousands of customers, with banks reassessing risk, slashing credit limits and in some cases withdrawing credit entirely from customers suddenly deemed “high risk.”
Store cards often carry even higher rates than credit cards. Again, customers are drawn in by initial interest-free incentive schemes, but the lenders rely on a proportion of customers being unable to pay off the balance and being exposed to huge interest payments.
If you have store or credit cards, you can use a pension release to get rid of them once and for all. The alternative, of paying significant monthly interest while you have money tied up in an inefficient pension plan simply makes no sense.
The golden rule, however, is to avoid cycling back into the same situation. Once the cards are paid off, destroy them and stay debt-free!
Overdraft – most banks will offer some sort of overdraft facility to loyal customers, but to many this starts to be seen as “free money.” When banks offer an interest-free overdraft facility, then it makes financial sense to make use of it, but if the limit is exceeded, the penalties can be significant.
For many retirees, it is not just a case of what makes the most financial sense, however. Making full use of a £3,000 overdraft can mean that your current account is never in the black. Clearing it off and seeing “real money” in the bank can be a huge weight off your shoulders.
Personal loans – as we approach retirement, most of us want to make sure the everyday necessities of life are in good, trouble free order. No wonder so many of us take out personal finance deals to pay for home improvements or a new car. In fact, contract purchase now makes up more than 75% of the finance deals provided on new vehicles.
You might think that you are stuck with these payments till the end of the agreed term, but there are simple payment calculators that take into account interest rates and early
repayment penalties so that you can see what is right for you.
Can I cash in my private pension?
The pension reforms apply across the board, and most people can unlock money, whatever type of pension they have.
However, every individual’s circumstances are unique. Contact us today to find out how to pay off your debts and have the retirement that you have worked so hard towards.