Dealing with debt
We all want an enjoyable and relaxing retirement, but there's one thing that can easily put a dampener on your plans for later life: debt. It's accepted as a fact of life these days, yet when you're in retirement, debt becomes a lot bigger an issue than before. Why is this? How can you get rid of debt prior to and during retirement?
Why debt matters in retirement
The biggest effect debt has over us is its ability to reduce our income. With debts to service, our ability to accumulate funds is heavily reduced, in turn affecting our capacity to build a pension pot that'll give us a decent income later in life.
If you're left with debts by the time you stop working, the income from your State Pension and any other pension pots you have will be drastically reduced as you try to pay off credit cards, personal loans or a mortgage, impacting the lifestyle you desire and, at the worst end of the spectrum, driving you into hardship when you're at your most vulnerable.
How to reduce your debts
Avoiding the financial negatives above is very important, but if you're in debt and don't see a way of escaping your situation, there's no need to fear – there are lots of ways to deal with the debt.
Reduce debts, then save
If you've yet to retire, it's important that you use your income to reduce your debts before you pay into a pension pot. Given that debts increase with interest, it's important you tackle them as quickly as possible – it's highly unlikely that you'd be able to earn more in interest from the same money if it were put in a pension or investment.
Work for longer
We no longer have to retire from employment entirely when we reach pensionable age, so if you're still being hampered by debts, consider staying on at work. If you're able to do so, this will allow you to receive an income to pay down the debts and increase the size of your pension, and further still, to boost your State Pension, if you choose to defer it.
If you're unable to continue at your current workplace, then consider part-time work, as this will still give you a massive boost, compared to if you'd simply hung up your hat.
Move your debts
Credit cards, mortgages and personal loans can be made more manageable by the simple act of moving them to a different provider or product. By taking advantage of zero-interest deals, you can give yourself more breathing room, and if you're able to get hold of loans that are of a super-low rate, you could use this money to pay off a debt that's rising due to a high interest rate.
Get a lifetime mortgage
If you're happy with the idea of unlocking some of the value stored in your home, you could consider getting a lifetime mortgage to repay some or all of your debts . These mortgages give you a percentage of your home's worth in cash, which is paid back when the house is sold upon your death or move into long term care.
Remember though, lifetime mortgages may reduce the amount of money you'll be able to pass down as inheritance, and if you choose not to make any interest payments during the mortgage the interest will increase the amount of money to be repaid when you die or move into care. It's also important to bear in mind that although the money is tax-free, receiving a lump sum could impact any state benefits you receive.
Debt doesn't have to ruin your retirement, and with a bit of financial planning and foresight, you can eliminate the stress of it entirely, letting you enjoy your golden years in peace.
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