Growing optimism about the economy, combined with some older consumers continuing to feel the impact of the pandemic on their finances, will see the amount of debt owed by the over-55s increase from £226 billion in 2020 to £236 billion this year, research from More2Life reveals.
According to More2Life much of this borrowing will be taken out by older consumers who are more optimistic about the economy and their personal finances this year compared to 2020. This optimism will see those aged 55 and over more willing to borrow money to pay for big ticket items such as home renovations or a new car.
Some of this borrowing, however, will be incurred by older consumers who have been financially negatively impacted by pandemic and who, as a result, are turning to debt such as borrowing on credit cards or overdrafts, to manage financially. More2Life estimates that those aged over 55 will owe almost £20 million in unsecured debt next year, with £4 million of this borrowing in the form of credit card debt.
Although borrowing can be a good way of paying for much needed home renovations or can provide help to those experiencing short-term financial problems, those aged 55 and over should be cautious about taking on debt, especially as they near retirement.
For many people, the goal is to reach retirement debt-free. Those with 10 years until they retire and who are in debt, should start looking for ways to clear their debt as early as possible. Not only will this make retiring a more stress-free process, but paying off debts will help to free-up money that can be used to increase pension contributions or savings to help boost retirement incomes.
Those with a mortgage should be nearing the end of their mortgage term and should be aiming to have the full amount repaid by the time they retire. For those that may find themselves with an outstanding mortgage after retirement, it may be worthwhile, if financially possible, to make overpayments now to clear as much of the mortgage debt as possible before retirement. Those considering this option, should however, check to make sure their current deal allows overpayments. A mortgage broker will be able to provide advice about whether borrowers should make overpayments and possible alternative options that may help make paying off the mortgage quicker and cheaper.
Another common form of debt is outstanding credit card and loans. Those who just owe money on credit cards can consider moving their credit card debt to a 0% balance credit card, which will provide an interest-free period in which to repay the debt. Some 0% balance credit cards do charge a balance transfer fee when transferring debt, so borrowers should take this fee into account when considering this option. Ideally, before moving the debt to a 0% balance credit card, borrowers should have a repayment plan in mind that will enable them to repay the full amount, or clear as much as possible, during the interest-free period. Our balance transfer credit card interest calculator shows how much can possibly be saved in interest costs when transferring outstanding balances to a 0% balance transfer card.
For those with outstanding credit cards and loans, consolidating debt into one personal loan may be a good option. Often, consolidating debt into a personal loan will help to reduce the cost of outstanding debt as borrowers are just paying one interest rate, instead of several across various forms of debt. As well as this, consolidating debt into a personal loan provides a time frame and set monthly repayments in which to clear the debt. In addition to this, interest rates on personal loans have remained competitively low this year, with rates from as low as 2.80% APR on loans of £10,000 to be repaid over five years.
Those with debts of £20,000 or more will likely struggle to find a personal loan to cover this amount of debt. Instead, a secured loan could be an alternative option. A secured loan is aimed at those looking to borrow a substantial amount of money, usually a minimum of £20,000, and often more willing to accept borrowers with lower credit ratings than personal loan lenders. As well as this, for those with a high amount of debt, a secured loan could significantly reduce the repayments each month. Secured loans are, however, a much risker option than personal loans as they require the borrower to put an asset, usually their home, as security against the loan. As a result, if repayments are missed or the borrower defaults on the loan, it could result in them losing their home. This is why those considering a secured loan should be confident that they will be able to meet the monthly repayments. For more information about secured loans visit our secured loans page.
If you are struggling to keep up with debt repayments or are falling further into debt, you should consider speaking to a free debt advice charity such as Citizen Advice who will be able to give advice and support in managing, reducing and clearing your debt.
For those nearing retirement or who are about to retire, having debt can make the transition into retirement stressful. Fortunately, there are still some options available to clearing debts before retirement.
One option for those about to retire to clear debts is by downsizing to a smaller, cheaper property. Homeowners can use the sale of their current property to buy a less expensive home, which enables them to free-up additional money that can be used to pay-off debts. As well as this, moving to a smaller home will often reduce monthly outgoings as the property will normally be cheaper to maintain than their previous home.
Homeowners who do not want to move home and who own a substantial amount of equity in their property can consider equity release instead. Equity release allows homeowners to release equity they have built up in their home through a loan that does not have to be repaid during their lifetime. This loan can often be taken as drawdown, meaning that the borrower only takes the money that is needed, allowing them to take more at a later date if required. The initial drawdown can be used to repay debts, including any outstanding mortgage left on the property. An advantage of taking drawdown is that interest is only added to the amount that is actually released, which can reduce the cost of borrowing through equity release. Although equity release does not have to be repaid during the borrower’s lifetime, unless they move into permanent care, it can significantly impact the inheritance they leave behind and, as such, the borrower should get independent financial advice before going ahead with equity release.
Another option available to those retiring is to take pension drawdown and use the money to repay any outstanding debts. Pension drawdown allows retirees to take up to 25% of their pension tax-free and can be a tax-efficient way of dipping into pensions, while keeping the rest of the pension pot invested. Those considering pension drawdown should have a realistic idea of how much they can take from their pension without risking running out of money later in life. Again, it may be worthwhile speaking to an independent financial advisor before taking pension drawdown to discuss how much of the pension to take, the long-term impact it will have on their retirement income and alternative options that may be available.
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