Clearing debts with pension could cause long term problems

Published: 09/01/2015

There are fears that many retirees could leave themselves financially short by using the majority of their pension to pay off existing debts.

According to research by Key Retirement Solutions, over half of over 45s owe money on credit cards, mortgages, personal loans or other financial arrangements while one in five expect to still have these debts when they come to retire.

Currently we are allowed to take out up to 25 per cent tax free; the remaining is then used to purchase an annuity. However from April 2015 retirees are able to withdraw all of their pension in one lump sum should they so choose. The first 25 per cent will remain tax free. Anything above and beyond this amount is subject to tax.

While this could offer a short term solution for retirees Head of Equity Release at Goldsmith Williams, Richard Espley, is concerned it could lead to a far bigger financial difficulties in the future:

“Whilst I fully support a person’s right to do what they wish with their own money it is vital retirees are realistic about their finances. Should they choose to withdraw a significant chunk of their pension now they must ask how are they going to finance the rest of their retirement?

“One solution could be to unlock some of the value of their property by taking out an equity release plan.

“Equity release allows homeowners to utilise some of the funds tied up in their property, either in a lump sum or in smaller, more regular payments. They retain the right to live in the property for as long as they choose and the equity released, along with any interest accrued, is then repaid when the property is sold.”

Content correct at time of publication