How to pay debt on a fixed retirement income
By Benjamin Salisbury
Many people entering or preparing for retirement still have mortgage or credit card debt to pay. With a post-retirement fixed income likely to be less than what you had been earning at work - and with fewer alternative income options for retirees - managing debt can be tough.
Financial services company Old Mutual reports that 30% of people over 65 have debt, with 19% saddled with debts of more than £50,000
"We know from our research that there are quite a few people that enter retirement with debt, normally an outstanding mortgage, or credit card," Adrian Walker, Old Mutual Wealth retirement planning expert, said in an emailed response to questions.
"Often they will use a lump sum from their pension to pay this off, but of course this can eat into their future retirement income."
Walker and Jane Tully, director of external affairs at the Money Advice Trust, offer their advice to retirees (or those close to retirement) who still have debts to pay.
List your income and expenses - and be realistic about it. Subtract your expenses from your income and with the amount left, work out how much you can pay monthly for each debt.
"Drawing up a budget will help you keep track of when essential bills need to be paid and enable you to plan future spending," Tully said in an emailed response to questions.
Once you've drawn up your budget, including at least minimum debt repayments, then, if you have money left over, you can pay some debts more aggressively to minimise interest. The sooner you can be debt-free, the better for your future.
"It's important to focus on priority debts and those with the highest interest rates first of all if you have multiple debts," Tully said.
you can't afford payments, contact your creditors
Write notes to your creditors summarising your financial situation, how you got into debt, why you are struggling to meet repayments and how much you can pay on a regular basis.
Or, call each of your creditors and explain your situation and try and negotiate a repayment schedule. Propose a plan to each, but make sure it is realistic. Reneging on a new plan may make it more difficult to negotiate with creditors in the future.
And try to avoid adding to the debts.
If you're going to borrow close to or in retirement, you'll need to have a clear plan as to why you're borrowing, Walker said. The important thing, Walker added, is to work out a repayment plan before you borrow.
"This is crucial, but it is all too easy to put it off and find yourself in difficulty as a result," he said.
Look for any other source of income to help you pay debts
Cash in savings. Look at your overall
finances - there may be income sources that you can utilise to help with the
debt repayment situation.
Potential options include cashing in a life insurance policy, using some of your pension pot or cashing in savings accounts that pay a low rate of interest.
If you have savings hidden away to cover emergencies, it makes sense to use some of that to repay debt, particularly if the interest on the debt is higher than the savings interest you are earning.
It may be painful for you to say goodbye to some of these stashes of cash, but you'll be glad in five, 10 or 20 years when you are not still paying credit card debt from your 50s.
You may have some income options that aren't savings.
"Make sure that you are claiming any benefits to which you may be entitled," Tully said. "In addition to the state pension, you may also be able to claim the Winter Fuel Payment."
Find extra income.
Tully also suggests thinking outside the box for income streams.
For instance, consider renting out a spare room or basement to earn some extra cash. "You can normally receive this rental income tax-free up to a certain threshold," she said.
Of course, you could go back to work at least on a part-time basis. For many, this is an attractive option with benefits other than helping reduce the debt burden, as it will also supply some extra cash for savings or fun.
You may be able to use capital tied up in your home through equity release.
Downsize to a smaller home, and use excess funds from the sale to repay debts.
You also could look to release funds from your home and stay in it. You may want to take out a reverse mortgage (a loan against your home that you do not have to repay as long as you are living in it).
"If you are worried about your debts, it's important to seek free debt advice from an organisation like National Debtline or another charity-run service at the earliest opportunity," said Tully. There are several free debt help charities in the UK that can guide you to the best options for your situation.See related: How to manage debt on an unpredictable income, How to deal with debt in preparation for retirement
Published: 11 November 2016
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