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How Britain’s growing debt is impacting our pension potential

2nd August 2017 Print

In November 2016, Britain’s household debt skyrocketed to its highest level since the financial crash of 2008. The country borrowed £192.2 billion in that month alone — a 10.8% increase from the same period in 2015. £66.7 billion of this was spent on credit cards.

Despite predictions that this high borrowing level can’t be maintained, The Office for Budget Responsibility (OBR) estimates that by 2021, UK households will spend £49.6 billion more than they earn.

So what kind of impact is this level of debt having on our ability to contribute to our pensions? Research from True Potential Investor suggests that our spending now could be severely limiting how comfortable we are in later life.

Personal pension provider True Potential Investor’s quarterly Tackling The Savings Gap Consumer Savings and Debt Data found that many Brits expect to retire with debt. At 55, UK savers can access 25% of their pension pot tax-free. A fifth of respondents said they would use this sum to clear debt. Likewise, 42% of savers said that they would use an unexpected £1,000 windfall to pay off debts.

Although many financial advisors promote clearing debt early to avoid interest charges, the study has found that those near retirement are continuing to create new debt. The study found that over 55s took out an average of £1,108 of debt in Q3 2016.

What kind of impact does this have on our pension potential? Naturally, an increase in debt limits the amount of available cash we’re able to put towards our future. UK people currently set aside £325 a month on average into their pension pots and are on-course to receive £6,000 a year in retirement. Despite this, research has shown that an annual income of £23,000 is required in retirement to live comfortably, underlining a stark difference between expectation and reality.

Overall though, we have witnessed a positive shift in pension attitudes. The number of people who save nothing towards their pension dropped in Q3 2016, down to 35% from 39% in the previous quarter. Clearly, people are aware of the importance of saving for their future and with greater financial knowledge and awareness, there is the potential to enjoy a more comfortable retirement.