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Money & Rights

Dealing with debt

More and more people are retiring still encumbered by debt. Teri Harman reports

It's a natural ambition to want to retire without the burden of debt hanging over us. Ideally, when we swap a salary for what is almost always a lower income from a pension, we would like our mortgage paid off, credit cards under control and no large monthly repayments required on outstanding loans.

However, it seems that this is becoming more difficult to achieve. Retiring with outstanding debts is a problem that has started to grow again, according to new research by Prudential. The company says the proportion of people retiring in debt this year is the highest for seven years – jumping to one in four of 2017’s retirees, up from one in five last year.

Prudential’s retirement ‘Class of 2017’, who still have debts, owe an average of £24,300, which includes mortgage debt.

This is an increase of £5500, or 29 per cent, since last year and the first time Prudential has reported a growth in retiree debt since 2012 when the figure peaked at £38,200.

Moreover, Prudential estimates those who are planning to retire with debts in 2017, and expect to clear them, will take nearly three and a half years on average to pay them off – and the repayments will cost them an average of £230 a month, up slightly on the £224 a month faced by last year’s retirees. However, a worrying 16 per cent expect to take seven years or more to pay off their debts and seven per cent fear they will never do so. The research also found there are wide regional variations underlying the average national retiree debt figure, with people in London the most likely to owe money, while those in the West Midlands are the least likely.

Mortgages have become a bigger source of debt compared with previous years. Nearly four in 10 (38 per cent) of those expecting to retire this year with debt still owe money on property, up slightly from 33 per cent last year.

However, credit cards remain the major debt issue, with 51 per cent of those with debt still owing money on plastic at retirement.

Research from Aviva found over-55s owe an average balance of £840 on credit cards, which has also risen by 26 per cent since the third quarter of 2015.

Personal loans – the second largest form of borrowing – have grown by 42 per cent among over-55s over the same period. Research by Saga found that the over-50s, had personal debt on average of £12,218 in addition to any mortgage. Some two-thirds (67 per cent) – equivalent to four million people – have borrowed using a credit card, while just over a quarter (28 per cent) have a personal loan, and one in five are using an overdraft.

The research discovered that women were more heavily indebted than men, owing on average of £15,148, 55 per cent more than the £9739 owed by men.

The most common reason for borrowing among the over-50s was to buy something they couldn’t afford at the time, yet one in five said they borrowed because they were struggling to pay bills. Just over one in seven borrowed to make home repairs, while 10 per cent have got into debt because they lost their job.

Debt isn't always bad

The first point to make is that debt isn’t necessarily a bad thing. Interest rates have been at an historic low for some years and, provided you can meet the repayments out of income (either a salary or a pension), a mortgage or a personal loan is a perfectly sensible option. Using a credit card for any major purchases can be a great option, too, especially if you take one that has an interest free period during which you are able to clear the debt.

At the time of writing Halifax was offering 30 months’ interest-free credit on new purchases on its Mastercard, while both Sainsbury’s Bank and MBNA were offering 29 months’ interest-free. (For more options, see: (www.money facts.co.uk).

The majority of older people borrow responsibly. Sixty per cent of respondents in the Saga survey said they could easily afford their loan repayments without any detriment to their standard of living.

However, 29 per cent said they were struggling to repay their debts, and one in four felt overwhelmed by the amount of money they owed.

So, if you are struggling to repay debts, what is the best course of action?

Where to find help

The most important thing is not to ignore growing debt in the hope it will go away. If you feel your debt is spiralling out of control, seek help sooner rather than later.

Even if you are still working and just mildly worried about how you will manage when you retire, you could benefit from some advice. Vince Smith Hughes, a retirement income expert at Prudential, says: “Having to use precious retirement income to pay off debts could make life even more tricky for the newly retired.

“With this in mind, many people will benefit from a consultation with a professional financial adviser to help get their finances in the best possible shape before they retire.” However, Age UK warns: “Don’t be tempted to pay a debt management company.” You do not need to pay for debt advice, which may not even be good advice.

City watchdog the Financial Conduct Authority (FCA) has been critical of such companies; it’s a classic example of “throwing good money after bad”.

Certainly, it is madness to compound an already bad situation by paying for advice you can get for free

While you are seeking help, it’s also a good idea to write to your creditors asking them to suspend any repayments and interest while you take advice.

Most creditors will be reasonable if you explain the situation and show that you’re taking positive steps.

To help you approach your creditors, Citizens Advice has a sample letter on its website: (www.citizensadvice.org.uk/ debt-and-money/sampleletters- to-creditors/Holdingletter/).

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