Pension freedom could ease strain of expensive debt in retirement
More than four million retirees leave work with at least one financial commitment, forking out an average of £332 each month, research from Fidelity Worldwide Investment reveals.
Surveying today’s retirees on their financial commitments, Fidelity’s study shows that one third (33%) of an average retiree’s monthly outgoings is put towards servicing outstanding debt or helping family members with two in five (19%) stating they will never be completely free of them.
Worryingly, over one million retirees are barely breaking even and 12% have less than £50 disposable income left in their bank account at the end of each month.
Yet, more than half of retirees (56%) believe they could face a rise in their monthly outgoings over the course of the next five years. Unsurprisingly, almost half (49%) think rising living costs will put a further strain on finances; while 7% envisage having to spend more on healthcare as they get older.
Type of financial commitments
According to the research, paying off personal debt is the most common financial commitment amongst retirees, with 15% using their hard earned pension savings to clear outstanding loans and credit card bills, spending on average £269 each month.
Almost one in ten (8%) leave work with remaining mortgage debt to pay off, spending an average of £22,000 over the first five years of their retirement. This commitment is more common amongst those earlier into their retirement, with 11% of those aged 60-64 still having to pay off their mortgage, compared to 4% amongst those aged 75. Worryingly, just over one in ten (12%) of those still repaying their mortgage don’t think they will ever be free of this financial commitment.
Almost one million (7%) retirees are also tied into giving hefty handouts to family members, spending on average £291 each month covering living expenses for their nearest and dearest.
Alan Higham, Retirement Director at Fidelity Worldwide Investment, comments: “Too often retirees are portrayed as being uniformly well off, however, the research shows a significant minority are in financial distress. Pension freedom can allow them to become debt free quickly by accessing their pension fund savings.
“Expensive debt can cause people's finances to spiral quickly into a terrible place, so it is generally a good idea to clear debt as quickly as possible and people should seek expert guidance before acting as they may also be entitled to extra income from other sources. For example, my mother's employer had incorrectly been deducting National Insurance from her salary when she was past State Pension Age. Spotting this gave her a timely refund of £2,500.
“It is sensible to cover essential expenses such as food and heating with income that is guaranteed to keep pace with inflation. Basic expenses tend to suffer from higher inflation and over a relatively short time, people can struggle to provide the essentials. Using small pension funds to defer taking State pension can provide a big uplift for today's retirees.
“No matter how small your pension savings are, there's usually something you can do to have a better retirement."
Individuals can access Fidelity’s Retirement Service at fidelity.co.uk/retirement.