In what is being described as a ìworrying trendî by charities, a fast increasing number of older people are cashing in their pension pots in order to pay off existing debts.
Indeed StepChange, the debt charity, reported an 80% increase in the number of pensioners getting in touch with them asking for help to pay off debt in the two years up to 2014. The average size of the debt that their help was sought to reduce was over £18,500.
Chief executive for StepChange Mike OíConnor is quoted as saying:
ìGrowth in the number of people in this age group contacting us is a worrying trend. Together with large than average sums to repay, and higher levels of mortgage arrears, many people are entering retirement with the prospect of never being able to get back on their financial feet.î
Old Mutual, in their Redefining Retirement report, came up with even more drastic figures than StepChange, finding that a third of all people over 65 were in debt with almost a fifth reporting debts of over £50,000, and a tenth reporting debts of over £100,000.
The most common form of debt that people approaching and past retirement age are saddled with is mortgage debt, affecting almost a third of the population in this age group. This is supported by findings from Scottish Widows, which claimed that almost 50% of people aged between 50 and 59 felt themselves under significant financial pressure as retirement fast approached.
The upshot of all of this is that by the time most of these people reach retirement age, their pension pot will have already been emptied in order to pay off their existing debts, leaving the elderly with little to no money to live on once they stop working. Money that rests in pension pots is now easier to access than ever thanks to pension freedom reforms that were introduced earlier this year, in April, but statistics show that the vast majority of the money that is accessed is used to pay off debts. The reforms mean that people can access the money in their pension fund and take out lump sums, rather than having to rely solely on a monthly income once their pension is activated.
According to the aforementioned Redefining Retirement report, the average amount of money taken out of pension pots by retirees since the pension freedom reforms in around £28,000.
Indeed Fidelity, a pension providing company, reported that almost a third of their customers used their freedom to withdraw to take out money to pay off debts of various kinds.
Rising debt is an issue generally but there are steps that can be taken in preparation for retirement that ensure that you can keep as much of your pension pot as possible back to use to cover basic living costs.
You could use an interest-free credit card with a small balance transfer fee to pay off existing debts and stop interest from getting out of control, for example.
You should also consider increasing the monthly payments on your mortgage if at all viable in order to reduce the amount that there is left to pay of when you come to retire.
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