How To Cope With Debts In Retirement
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We all hope our debts will be a distant memory by the time we retire, but for many that's a fading hope.
A recent study by Help the Aged and Barclays discovered that one in four people still have outstanding debts by the time they reach state retirement age. Worse still, one in eight households headed by someone in their sixties are still repaying their mortgage. Many people are being forced into delaying their retirement until their finances are more healthy.
It's a worrying statistic that people approaching retirement now owe four times as much as they did a decade ago. Even owing a small amount can cause great financial difficulty for those living on a pension.
Changing lifestyle
If you're on the verge of retiring, the change in lifestyle can play havoc with your finances. The chances are you'll have a lower income now than you did while you were still working.
Many people live on a fixed income after they retire. Unfortunately, a fixed income and above-inflation price rises aren't a good combination. Your income may not be keeping pace with the increase in the cost of your food, council tax and utility bills.
With debt repayments on top of that, affordability can become a major problem. In fact, many older people are resorting to paying for essential items with their credit cards or raiding their pensions early to clear debts.
If that sounds like you, what can you do to get a grip on your finances?
Maximise your income:
The over 65s may be entitled to a higher personal allowance. This allowance is the amount of income you're allowed to have before you start paying tax. If you're over 65 you could be entitled to a tax-free personal allowance of £9,030* a year rising to £9,180* if you're over 75.
Remember, the age-related personal allowances are not always applied automatically so it's worth checking yours is correct.
If you're on a low income you may be entitled to the Pension Credit which tops-up your income to a minimum level. You may also qualify for Council Tax Benefit and Housing Benefit (if you're paying rent). You would be surprised how many people fail to claim their full entitlements.
To find out if you qualify for of these benefits and others, take a look at Can You Claim It?
If you're struggling to keep your head above water, it's a good idea to look at your budget. Have you got more going out than coming in? If so, it's time to think about cutbacks. Use the personal budget lists available at the Help The Aged website to get everything down in black and white.
Make sure you pay your bills monthly to spread the cost rather than being faced with larger quarterly or annual bills. If you're over 60 and receiving benefits, you may be entitled to a grant to insulate your home or to install central heating. This could help to keep your heating bills down. Find out more about that here.
True, this may not be ideal, but if you're having trouble making ends meet this is one way of making a positive impact on your income and ultimately, dealing with your debts. Take a look at these tips on working later in life.
If you're a homeowner:
If you have more room than you need you could think about downsizing to a smaller home. This might free up enough cash to help you clear your debts. Of course, you'll have to put up with the hassle of moving. If you would rather stay put, consider releasing equity from your home instead.
Equity release schemes allow you to unlock some of the capital that is tied up in the value of your home. But, crucially, it allows you to stay in your property as long as you need to.
But be warned: equity release schemes can be expensive so you really must speak to a financial adviser who specialises in this area before going ahead. Read more about equity release.
If you have a spare room the government allows you to let it to a lodger through the ‘rent-a-room' scheme. Under the scheme you can earn up to £4,250 a year from rent completely tax-free.
You don't actually need to own your home to qualify. If you're a tenant yourself you can still let a room and take advantage of tax-free rental income.
This is probably an easier solution than downsizing or releasing equity, but think carefully whether you would be comfortable sharing your home with someone else.
I hope these suggestions can help you get back on track with your finances in retirement. If you have a specific question, don't forget to ask for advice at our excellent Dealing With Debt discussion board. Many knowledgeable Fools are waiting to help you.
More: How To Buy The Right Annuity | Pensioners: Get Your Share Of £4.6 Billion!
*If your income is over the current 'income limit' of £21,800, the age-related allowance reduces by half of the amount (£1 for every £2) you have over the limit, until the basic rate allowance is reached (you'll always get the basic allowance, whatever the level of your income). So if, for example, you're 66 and you have an income of £22,300 (£500 over the limit) your age-related allowance would reduce by £250 to £8,780.
