Indebted Retirement for Many As Liabilities Continue

Posted by Tom Magor in Personal Finance on 12 December 2016 - Tom is a Senior Credit Analyst at checkmyfile.

While their working days may have come to an end, financial commitments look set to continue for a greater proportion of retirees than ever before.

A study conducted by More 2 Life has discovered that 40% of those aged over 55 will still have a mortgage and an overdraft as they enter retirement, with a quarter anticipating that they will still have outstanding credit card debt. This is a considerable increase compared to last year when only 31% expected to have financial liabilities when they retired.

Changes to the way in which retirees can access their pension funds may be a key contributing factor. With equity release schemes becoming increasingly widely utilised, many consumers may have the intention of clearing their debt using such schemes soon after retirement.

Dave Harris of More 2 Life says, “These figures make for very interesting reading, as we look to understand the borrowing behaviour of the over 55s. Unsurprisingly, the over 55s want to be debt free as they enter their retirement years. However, whilst money is being drawn out under pension freedoms, it is not being used to pay down existing debts to any great extent, but rather to replace new, short-term borrowing.”

Harris also says, “These findings highlight the fact that many over 55s are taking out credit via loans or credit cards as they enter retirement, some with interest rates as high as 19% APR. These borrowers may not be aware of the benefits and competitive rates that are now available from equity release lenders. Rates have been declining in the equity release sector and are on average around 4.5%, considerably less than rates on loans and credit cards.

“Some consumers may also be unaware that there are plans available on the market now offering the ability to repay some of the original capital each year without penalties, as well as ‘interest served’ plans also being available. This provides even greater flexibility to those who need to borrow in retirement but want to mitigate the cost of that borrowing to keep it as low as possible.

“Our research also shows that many people have begun dipping into their retirement pots to replace short-term credit facilities for spending. Many of these individuals will have an ace up their sleeve, however, which will be their property wealth. It’s therefore crucial that retirees are made aware of how they can access the funds, safely and easily.”

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