Keeping on top of your finances in retirement: How to deal with debt

Managing debt, such as loans and credit cards, when you retire can be a challenge – especially as your income is likely to be reduced. If you’re worried that debt will leave you struggling to pay your household bills in retirement, there are steps you can take to help you get on top of your finances and focus on enjoying life after work.

Make a budget and see what you have

Even if you’re not in debt, making a budget is a good idea as it can help you keep track of exactly what you are spending and whether you can make any changes. The first thing to do is work out how much you need to have for your household essentials each month. This can include big things like food, energy bills, council tax, rent or a mortgage, but also smaller expenses that are essential – for example pet food, travel costs or glasses. Then, if you are repaying credit cards or loans, work out exactly how much you are currently spending repaying these each month.

Once you’ve made a budget and know what you need to spend on essentials each month, any eft over can be used to help pay off your debts. If you have not yet retired, you may want to budget to make sure they are repaid first, while you are more likely to have more disposable income.

This online budget planning tool on the government’s Money Helper website might be useful to help you work out what your expenses add up to.

Reduce your interest payments

If your interest payments are high, it can be difficult to clear your outstanding debt. Thankfully, there are a few things you can do to help reduce these interest payments.

Firstly, if you owe money on credit cards, or personal loans, it may be possible to switch to a lower interest rate. Some credit cards charge no interest for a promotional period, although you will have to pay a one-off fee of up to 4 percent of the outstanding balance. Websites such as USwitch can help you compare credit cards to see which have the best interest-free periods.

If you do decide to refinance, make sure you pay off your outstanding debt within the promotional period to avoid paying any further interest fees. It could be a good idea to set up a direct debit or standing order to make sure it is paid each month.

If you have a small amount of time left on your mortgage, it may be best to try and keep paying this debt as usual, paying it off more quickly. This is because if you are in a fixed-rate deal, your lender may charge you an early redemption fee if you clear it early.

Use your tax-free cash wisely

You can take up to 25 percent of your pension pot as a tax-free lump sum, and it might be tempting to take this money and use it to immediately pay off any debts you might have.

While this is definitely an option, it’s important to think it through carefully before doing this as it could leave you with less pension income over the longer term. Taking any additional money out of your pension may also mean you owe tax and/or may impact your state benefits. 

If you feel the best use of your tax-free cash is using it to pay off debts, it might be worth working out if there is a trade-off between the interest you pay on your debts and the amount of pension income you may be sacrificing.

Get debt advice

If you cannot afford to pay off your debts, there are charities and organisations that can help you for free. StepChange has an online debt advice tool, and can offer free debt advice, as can NationalDebtline and Citizen’s Advice. They may be able to help you reach an agreement whereby you pay off small amounts of your debt when you retire.

If you are considering bankruptcy, make sure you get financial advice to check how it will impact you before going ahead. In most cases, your pension fund isn’t considered an asset but if you take money out, your creditors may be able to insist it is used to pay off your debt.

You can also use the value of your property to secure a loan to pay off debts or use for other large purchases such as a lifetime mortgage or equity release. The interest rate is generally higher than a standard mortgage and there are pitfalls such as entitlement to certain state benefits may be affected. It is therefore important that you seek professional financial advice if you are to consider this or other options. 

Your budget checklist

There are certain benefits you might be entitled to that could save you some money in your monthly budget and help you to repay your debt. When budgeting, it’s worth doing the following to see if it can help:

• Find out if you are entitled to any benefits, such as pension credit if you are over the state pension age
• Check if you are entitled to housing benefit if you need help with housing costs
• Ensure you are getting as much help as you can with your heating bills. The government’s benefits calculator can help you with this.
• Make use of local services such as food banks or support schemes that can help you with other extras
• Make sure you are claiming any other free entitlements such as a TV license, bus or train pass and medical prescriptions
• Track down any lost pension or savings to ensure you don’t have any additional sources of finance going unclaimed

If you have debt that you think you will struggle to repay in your retirement, it’s important to ask for free help. There is always something that can be done to assist you and make your situation more manageable.