How to avoid a retirement in the red

by John Fitzsimons on 28 March 2011  |  5 comments
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Guest blogger Clive Bolton of Aviva looks at why so many are reaching retirement still in debt, and how to avoid an indebted twilight.

The financial outlook for people in retirement has been the subject of great interest in the media recently.

The latest official projections for longevity show that by 2034 the number of people aged 85 and over in the UK is projected to reach 3.5 million – or 5% of the total population. It is then not surprising that the pressure on people’s income in retirement is often front page news.

Government plans

The Government is acutely aware of the implications of an ageing population on the welfare system and has started to roll out a raft of measures designed to target this. Some of these include the scrapping of the current default retirement age (DRA) of 65 later this year, and raising the actual age people can begin receiving their state pension (to 66 by 2020).

More recently, in March, the Work and Pensions Secretary Iain Duncan Smith signalled the reform of the pension system with a proposal to introduce a flat rate pension of around £140 a week as part of a plan to simplify the system. On top of this the Hutton Report has recommended that final salary linked pensions for public sector workers are stopped and based on career average salaries instead.

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For more on these changes have a read of Public sector to work longer for worse pensions and State Pension to jump by £40 a week.

Reaching retirement in debt

To varying degrees all of these measures will have an impact on people’s finances in the future, but what is the situation now? And how have those close to retirement or already retired been coping with the changes in the economic situation over the last year?

Aviva’s Real Retirement Report has been monitoring the finances of the UK’s over-55s for some time and has found that over the last 12 months, average incomes have fallen by 4% and the number of households with savings pots of less than £500 has increased from 21% to 30%. Alongside this mortgage debt has grown by more than £10,000.

And in terms of unsecured debt, almost one third (30%) now say they have at least one form of debt such as a credit card or personal loan. This in itself is not necessarily a problem, but more of a concern is the fact that almost a quarter (23%) do not expect to be debt-free until they reach 75, and one in seven (15%) do not expect to ever be able to pay off this debt.

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So what is the root cause of this situation? On one level it appears that the main reason is simply the increased cost of living, but added to this there are also specific causes such as borrowing to fund an essential purchase or being unemployed. However, a reasonably high proportion have admitted their own financial decisions were at least partly to blame, with some saying poor money management was the reason, while others felt they’d overspent on non-essential items such as holidays.

For those still of working age, these figures are a warning for people to take immediate action to ensure that retirement income expectations are likely to be met. With so many people living longer, financial planning in retirement is essential if people are to maintain their desired standard of living when they stop working.

For those classed as retiring (65-74) and long-term retired (75+) it is a slightly different situation as they are more likely to be living off a relatively fixed income. While previous reports have indicated that many people are looking to work into retirement – something which will be made easier with the removal of the DRA – this will not be possible or desirable for all.

Bricks and mortar

There are many options available to those in retirement looking to manage their finances. But it is interesting just how much equity the over-55s have tied up in bricks and mortar. The over-75s in particular look to be sitting on significant housing wealth, and Aviva’s research shows more than eight in 10 people aged over 75 have more than £250,000 of equity in their home. Concerns about debt repayments and the impact of the rising cost of living on those in retirement could mean this equity may play an increasingly important role going forward.

The simple message is that people need to be thinking about providing for their retirement earlier in their working life as the life expectancy figures show we’ll be living longer we will increasingly need to provide for ourselves. Taking professional financial advice and making sure that saving for retirement is a priority and not something to worry about further down the line can help to reduce the impact of shocks in retirement, meaning people can enjoy their golden years to the fullest.