You should ideally try to enter retirement debt free.  Bad debt, where you are paying interest on ‘stuff’ you have purchased adds up to a lot of money per annum, when you could be using it to enjoy retirement. 

The preparation steps for retirement 

So, to recap from Retirement Planning: how to begin preparing for retirement. The steps to take before retirement 

  1. Know how much your state pension entitlement is
  2. Find or trace all your pensions and maybe consolidate into one tidy pot*
  3. Draw up a budget of annual living costs during retirement 
  4. Calculate how much monthly income you will receive from your pensions, investments, and/or assets. 
  5. Look at ways to clear your debts – to reduce monthly expenditure
  6. Alternatively, or as well as, consider ways to boost your pension to increase your overall income
  7. Work out when to start taking your pension – and maybe get some advice on your choices, especially if your income is not covering your outgoings. 

*Seek impartial advice on pensions and really do your homework before taking action.

Your income is likely to be lower when you retire

Your income is likely to be lower when you retire, so debt repayments, especially large debts like your mortgage will take up too much of your income and maybe even push your retirement back a few years. 

There are a few obvious things you can do as you draw closer to retirement, aim to stay well away from credit cards.

Reduce your spend elsewhere to try and pay off debt – always focus on the highest interest rate first – it’s efficient. 

Depending on your pension type, you can use the tax-free lump sum to clear your debts, but ensure this is not a too large sum, as you don’t want to leave yourself short later down the line. 

Some people use equity release to clear debt, which like most financial products have its pro’s and con’s.  This can be a high interest option in the long run, but sometimes it allows you to hit your retirement date, and it aligns your pension incomes with your spend.  The key thing to remember with equity release is always seek expert advice and only ever take what you need, as interest compounds year on year. 

Also read: Is Equity Release a good idea?

Can I get free debt advice? 

If you are concerned when and how you can afford to retire due to credit card, loans or mortgage debt, there are lots of free advice services available across the UK.  Check out this link from the UK Money Advice Service