Debt in retirement
Carrying forward debt into retirement is a dilemma which many people face. At a time in life where you hope to look forward to leisure and relaxation, financial worries can instead create anxiety and limitations
There are multiple options to consider to help manage your income and expenses and here’s an introduction to some of them.
Boost your retirement finances
Many retirees find themselves asset rich and yet cash poor. If you’re a homeowner, then this is undoubtedly one of the biggest sources of equity you have. Two possible ways in which you can use your home to increase your finances in retirement are equity release and downsizing.
Asking family and friends for help, using existing savings and investments, and loans and other forms of borrowing, are some alternative options to using your home.
Equity release
An equity release plan allows you to access the cash tied up in your property, free from tax. The money you release is yours to spend as you like, and for many people, it provides a much needed solution to paying existing debts.
However, you should think carefully before securing a loan against your property and if equity release is right for you. You can get all the necessary information by thorough research and by speaking to an expert.
- Equity release plans allow you to unlock the cash from your home
- You must be aged between 55 and 95 and own a property worth at least £60,000 to qualify
- Taking out a plan will reduce the value of your estate, leaving a reduced inheritance for your children
- Equity release may affect your entitlement to means-tested benefits
- A lifetime mortgage, a popular type of plan, is secured against your home, just like a traditional mortgage. With a lifetime mortgage there are typically no monthly repayments to make as the loan, plus roll up interest, is repaid when the plan comes to an end
- Plans approved by the Equity Release Council ensure you will never owe more than the value of your home
- There are plans available where you can guarantee an inheritance for your loved ones
- You could be entitled to release more money based on your lifestyle choices and health conditions, like diabetes
Downsizing your home
Selling your home and buying a smaller property can prove a practical way to free up money. Once you reach retirement, it’s more likely that you no longer need the extra space in a family home, which can be costly in terms of heating and general maintenance. Smaller properties, especially new builds, often produce lower maintenance and central heating bills and are easier to take care of.
As well as improving your financial outlook, downsizing has other merits, including the chance to move closer to family, or to a more preferable location.
If you choose a bungalow for your new home, accessibility and mobility should be far better. As you get older, stairs can become problematic and a potential fall hazard, which a single storey home helps to eliminate.
You could consider moving into a serviced apartment. Assisted living offers all the satisfaction of independent living, but with the added peace of mind that there’s always help nearby. For example, with a serviced apartment you could live with a team on site to support your domestic activities, like shopping and cleaning.
Or you may find that moving into a retirement village suits you. Retirement villages combine luxury properties and leisure facilities together to build a community of like-minded people. An ideal way to be introduced to new friends.
It’s worth bearing in mind that moving home has its downfalls too. Downsizing can part you from a much-loved family home. The money you receive also needs to cover moving costs such as stamp duty, removal services and agency fees, so all the pros and cons need to be considered before making a move.
Take control of your finances
It’s essential to have your money well-organised when it comes to managing your debt, reviewing your spending habits and reconsidering necessities versus ‘nice to haves’.
Budgeting
If you’ve never created a personal spending/saving plan, then now’s the time to do so. Or revisit your existing one if you have one. Having all of your incomings and outgoings laid out before you will help you to review your finances and see where cut backs can be made and money saved. The ultimate goal is to understand how much you owe and how much money you have available. Be sure to record all the due dates of payments in a book or on an Excel spreadsheet. From this, you can make a monthly financial calendar to chart what you owe and when upcoming bills are due.
Annuities
Pension freedoms have provided greater flexibility for those looking to utilise their pension funds. In addition to annuities there are other retirement options you can choose like cashing in and pension drawdown.
A pension annuity allows you to convert all or part of your pension pot into regular income payments. The money can then be used, for instance, to pay for household bills and living expenses, leaving you safe in the knowledge that there’s always cash available for these requirements.
An annuity is irreversible and once purchased it will continue to provide you with a source of income for the rest of your life. With a joint-life annuity plan you can even use the money to look after your spouse.
Instalments can be set up on a monthly, quarterly, half-annual or an annual basis.
- A standard annuity is purchased at a one off rate, so make sure you shop around for the best deal
- Any payments generated from a pension annuity will be taxed as income
- The effects of inflation may erode the value of your annuity income
- You could be entitled to more money with an enhanced annuity. The list of qualifying health and lifestyle conditions can be extensive, so it’s worth mentioning details such as any ill health and even where you live, to providers.
Who can you ask for help?
Debt management should be discussed with a financial expert who can advise you on what’s right for you. For free and impartial guidance, visit The Money Advice Service.
If you or your older relative are interested in finding out more about equity release or pension annuities, call Key Retirement free on 0808 252 9170, or visit Key Retirement to arrange to speak to a specialist or to request one of their free guides.
