Use a Tax-Free Pension Release to Pay Off Debts
More than 80% of us expect to retire debt free, but only 65% succeed in doing so. Unlock your pension to pay off costly debts early for a better retirement.
We all see retirement as a time when we will be relieved from the stresses and strains of working life and can reap the benefits of all those years of hard work. The last thing we expect is to enter retirement owing money on a mortgage, or with other debts hanging over us.
Sadly, one in three people find themselves in just that situation, and one in ten retire with debts of more than £100,000.
If you are approaching retirement, paying off debt with your pension fund could be the ideal solution for a stress-free and debt-free future.
Many people assume that they must wait for retirement to access their pension, but reforms that came into force in 2015 have made pension release easier than ever. With pension funds facing increasing deficits, it makes no financial sense to continue paying interest on debts while leaving money in a pension pot and making negligible returns.
Thousands of people have taken advantage of the flexibility that pension release brings since the reforms were introduced, withdrawing an average of £28,000. One in five have used some or all of this money to pay off debts.
Debt on the increase
The average household has debts of over £13,000 excluding mortgages, an increase of more than £4,000 since mid-2015. Debt is now at the highest level in years, and The Independent newspaper has warned that the country could face a debt disaster similar to that seen in the early days of the global recession.
On that occasion, thousands of customers were caught out when a number of banks slashed credit limits overnight, even for customers with good credit histories. A Guardian article from 2010 gives a number of horror stories.
Those who had been struggling with debt fared even worse, with credit facilities withdrawn entirely as banks reassessed risk profiles.
Paying off debt
Average credit card interest rates currently stand at just over 15%, with some cards charging significantly more, so it clearly makes sense to pay off the balance as quickly as possible.
However, this is not the only type of debt that can be paid off for significant long-term savings. The average household owes over £42,000 in mortgage debt and around £10,000 in other loans and finance agreements.
There is a tendency to assume that we are stuck with these kinds of debts for the full duration of the loan agreement, but in many cases, it makes better financial sense to pay them off early, even if there are fees or penalties involved in doing so.
Peace of mind
Taking the financially logical course of action is an excellent reason for cashing in your pension to retire debt free, but even that pales into insignificance compared with the peace of mind that it can bring.
Retirement should be a time when we can relax and spend our hard-earned money on a happy, stress-free life. Paying off your debts is a first step towards the retirement you have dreamed of.