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‘Worrying trend’ as older people cash in pension pots to pay off rising debts ‘Worrying trend’ as older people cash in pension pots to pay off rising debts
(about 1 hour later)
Thousands of retirees and older workers have cashed in their pension pots in the past few months in an effort to pay off what charities describe as a “worrying trend” of escalating debt in retirement.Thousands of retirees and older workers have cashed in their pension pots in the past few months in an effort to pay off what charities describe as a “worrying trend” of escalating debt in retirement.
Debt charity StepChange says it saw about an 80% increase over the two years to 2014 in the number of over-60s contacting it with trouble paying off debt, with an average sum of £18,624, while new figures from Old Mutual suggest for some older people the debt problem is much more severe.Debt charity StepChange says it saw about an 80% increase over the two years to 2014 in the number of over-60s contacting it with trouble paying off debt, with an average sum of £18,624, while new figures from Old Mutual suggest for some older people the debt problem is much more severe.
The company’s Redefining Retirement report, released last week, found 30% of over-65s were saddled with debt, with 19% recording debts of more than £50,000 and almost one in 10 £100,000 or more in the red.The company’s Redefining Retirement report, released last week, found 30% of over-65s were saddled with debt, with 19% recording debts of more than £50,000 and almost one in 10 £100,000 or more in the red.
“Growth in the number of people in this age group contacting us is a worrying trend,” says Mike O’Connor, chief executive of StepChange. “Together with larger 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.”“Growth in the number of people in this age group contacting us is a worrying trend,” says Mike O’Connor, chief executive of StepChange. “Together with larger 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.”
Figures from a separate survey by Scottish Widows show almost half of those aged 50-59 felt the main financial pressure as they approached retirement was paying off debt. Mortgage debt is the most common form, with more than one in three still paying off their home loan; 14% of retirees hold credit or store card debt, and 6% have unsecured loans.Figures from a separate survey by Scottish Widows show almost half of those aged 50-59 felt the main financial pressure as they approached retirement was paying off debt. Mortgage debt is the most common form, with more than one in three still paying off their home loan; 14% of retirees hold credit or store card debt, and 6% have unsecured loans.
Charities are concerned pensioners will be worst hit when interest rates rise. Caroline Abrahams, charity director of Age UK, says: “Particularly worrying is the growing number of people entering retirement with a sizeable mortgage debt, but few ways of repaying it. We are concerned that this could result in a generation of older people struggling to make ends meet in later life.”Charities are concerned pensioners will be worst hit when interest rates rise. Caroline Abrahams, charity director of Age UK, says: “Particularly worrying is the growing number of people entering retirement with a sizeable mortgage debt, but few ways of repaying it. We are concerned that this could result in a generation of older people struggling to make ends meet in later life.”
Many people enter retirement with the prospect of never being able to get back on their financial feetMany people enter retirement with the prospect of never being able to get back on their financial feet
Pensions are the new debt solutionPensions are the new debt solution
Thousands of people in, or approaching, retirement have already drained their pension pot to pay off debt. Pension freedom reforms, that came in in April mean those at age 55 or over can access money they saved into a defined contribution pension. Statistics from a range of providers show the main reason for accessing this money has been to pay off debt.Thousands of people in, or approaching, retirement have already drained their pension pot to pay off debt. Pension freedom reforms, that came in in April mean those at age 55 or over can access money they saved into a defined contribution pension. Statistics from a range of providers show the main reason for accessing this money has been to pay off debt.
Figures from pension provider Fidelity show that in July, 29% of its customers said they were using their cash withdrawals to pay off both secured and unsecured debt. The average sum withdrawn from pension funds by retirees since April is £28,000, according to the Redefining Retirement report.Figures from pension provider Fidelity show that in July, 29% of its customers said they were using their cash withdrawals to pay off both secured and unsecured debt. The average sum withdrawn from pension funds by retirees since April is £28,000, according to the Redefining Retirement report.
“The new rules offer flexibility with a way to clear debt,” says Maike Currie, associate investment director at Fidelity. “You could take the tax-free cash and pay off your most expensive debt with this. However, make sure there aren’t any penalties to repay that debt early.”“The new rules offer flexibility with a way to clear debt,” says Maike Currie, associate investment director at Fidelity. “You could take the tax-free cash and pay off your most expensive debt with this. However, make sure there aren’t any penalties to repay that debt early.”
Jean and Tony Stace, both 66 and from Northampton, are fearful of coming to the end of their mortgage term and struggling to pay off their home loan. They pay £550 a month for a £165,000 interest-only mortgage at 4% on their three-bed house. The new pension rules came in too late to help them.Jean and Tony Stace, both 66 and from Northampton, are fearful of coming to the end of their mortgage term and struggling to pay off their home loan. They pay £550 a month for a £165,000 interest-only mortgage at 4% on their three-bed house. The new pension rules came in too late to help them.
“As we’re already retired, these rule changes aren’t much use to us, which is frustrating – we are tied into taking a monthly income,” says Jean, a retired secondary school teacher. “Instead, we’re hoping to downsize to find the capital to repay our mortgage.”“As we’re already retired, these rule changes aren’t much use to us, which is frustrating – we are tied into taking a monthly income,” says Jean, a retired secondary school teacher. “Instead, we’re hoping to downsize to find the capital to repay our mortgage.”
At present the couple live off a teacher’s pension and state pension, which Jean says makes things “financially tight”. Their home is worth £250,000. “We bought in 2008 and hoped to sell it soon after for a profit, but this never happened when the market collapsed.”At present the couple live off a teacher’s pension and state pension, which Jean says makes things “financially tight”. Their home is worth £250,000. “We bought in 2008 and hoped to sell it soon after for a profit, but this never happened when the market collapsed.”
She adds: “I know of others in a similar situation – I think people have more debt these days because they get a mortgage later on, and it’s a product of changing partners and divorce.”She adds: “I know of others in a similar situation – I think people have more debt these days because they get a mortgage later on, and it’s a product of changing partners and divorce.”
Related: Where to open the door to the cheapest personal loansRelated: Where to open the door to the cheapest personal loans
What to do if you’re strugglingWhat to do if you’re struggling
If you are approaching retirement and still have debt, take steps to reduce the sum. If you have credit card debt, one possibility is to get an interest-free credit card, which allows you to pay nothing on your debt for a set period. You will pay a balance transfer fee, which is usually a set percentage of the debt transferred. You can then make plans to pay off the debt during the interest-free period. The longest-running balance transfer card on offer is Barclaycard Platinum, with a transfer fee of 2.39%.If you are approaching retirement and still have debt, take steps to reduce the sum. If you have credit card debt, one possibility is to get an interest-free credit card, which allows you to pay nothing on your debt for a set period. You will pay a balance transfer fee, which is usually a set percentage of the debt transferred. You can then make plans to pay off the debt during the interest-free period. The longest-running balance transfer card on offer is Barclaycard Platinum, with a transfer fee of 2.39%.
If you are soon to retire and have yet to repay your mortgage, you might want to increase your monthly repayments if you can. Otherwise, lenders’ stringent age restrictions on new mortgages mean you could struggle to get a new deal at the end of the term (see box above).If you are soon to retire and have yet to repay your mortgage, you might want to increase your monthly repayments if you can. Otherwise, lenders’ stringent age restrictions on new mortgages mean you could struggle to get a new deal at the end of the term (see box above).
Alternatively, you could downsize provided you have enough left to pay for a smaller home after fees for selling and moving. Another option is equity release, which releases cash from your home while you live there. This requires financial advice, but ensure you opt for a provider in the Equity Release Council.Alternatively, you could downsize provided you have enough left to pay for a smaller home after fees for selling and moving. Another option is equity release, which releases cash from your home while you live there. This requires financial advice, but ensure you opt for a provider in the Equity Release Council.
Some simple budgeting can help you find spare cash to service debts. The Money Advice Service has a handy online tool to work out how much you have left on a fixed income after bills each month.Some simple budgeting can help you find spare cash to service debts. The Money Advice Service has a handy online tool to work out how much you have left on a fixed income after bills each month.
There are a number of other ways to boost income in retirement, says David Black of DJB Research. “These include taking in a lodger, and making sure you’re getting all the welfare benefits or grants you’re entitled to.” You can check what these are at www.entitledto.co.uk.There are a number of other ways to boost income in retirement, says David Black of DJB Research. “These include taking in a lodger, and making sure you’re getting all the welfare benefits or grants you’re entitled to.” You can check what these are at www.entitledto.co.uk.
CHANGE IN ATTITUDE Change in attitude
Lenders impose tough criteria when it comes to the maximum age at which customers can borrow money. This makes it hard for older people to find a new mortgage deal if they have not paid back all they owe.Lenders impose tough criteria when it comes to the maximum age at which customers can borrow money. This makes it hard for older people to find a new mortgage deal if they have not paid back all they owe.
“The majority of lenders will max out at age 70 or 75, assuming the applicant’s income is adequate to support the mortgage,” says David Hollingworth from mortgage broker London & Country. “That makes life harder for older borrowers, even on a secure retirement income. If they shorten the term this pushes up repayments, which affects affordability.”“The majority of lenders will max out at age 70 or 75, assuming the applicant’s income is adequate to support the mortgage,” says David Hollingworth from mortgage broker London & Country. “That makes life harder for older borrowers, even on a secure retirement income. If they shorten the term this pushes up repayments, which affects affordability.”
The few exceptions tend to be smaller building societies. “Bath building society has no maximum age, and National Counties can go beyond the typical maximum,” Hollingworth says.The few exceptions tend to be smaller building societies. “Bath building society has no maximum age, and National Counties can go beyond the typical maximum,” Hollingworth says.
Longer mortgage terms and older borrowers entering the property market means almost 35% of new loans are not expected to be repaid until the borrower has passed age 65, according to the Council of Mortgage Lenders. It adds that more than a third of new mortgages taken out today will extend beyond the borrower’s 65th birthday.Longer mortgage terms and older borrowers entering the property market means almost 35% of new loans are not expected to be repaid until the borrower has passed age 65, according to the Council of Mortgage Lenders. It adds that more than a third of new mortgages taken out today will extend beyond the borrower’s 65th birthday.
The CML has called on banks to change their attitudes to older borrowers. Its chairman, Moray McDonald, says: “We really need to crack lending into retirement. By just after the end of the new parliament in 2023, 24% of all adults will be aged 65 or older. We now have pensioner freedoms, and we need the same freedoms for the mortgage market.”The CML has called on banks to change their attitudes to older borrowers. Its chairman, Moray McDonald, says: “We really need to crack lending into retirement. By just after the end of the new parliament in 2023, 24% of all adults will be aged 65 or older. We now have pensioner freedoms, and we need the same freedoms for the mortgage market.”