Tips for clearing your debts in retirement 

Retirement should be a time to relax and enjoy life, but for many, outstanding debts can create financial stress. During your working life, you typically have a steady income to manage expenses and debts, but this changes significantly after retirement. With a reduced monthly income and rising living costs, retirees who owe money often face difficulties managing credit cards, loans, or even an existing mortgage. Tackling these debts early is crucial, and one increasingly popular option is equity release. By unlocking the value in your home, you can pay off debts and improve your quality of life without having to move. 

Is it Better to Pay Off Debt or Save? 

When it comes to financial priorities in retirement, paying off debt generally outweighs saving. Many lifestyle-related debts, such as credit cards or personal loans, carry high interest rates that can grow quickly if left unmanaged. Clearing these debts reduces financial strain and prevents interest from eating away at your limited income. While savings are important, reducing debt first can often lead to greater long-term security. 

How to Reduce Debt on Your Own 

Managing debt independently requires discipline and a clear plan. If you are struggling to manage your debt in retirement, consider seeking professional help such as debt advice or debt support from reputable organizations. 

Here are key steps to take: 

• Create a Budget: Track your income and expenses, prioritising essentials like food, utilities, and medical costs before tackling debt. 
• Repayment Planning: List all creditors, balances, and interest rates. Pay off the highest-interest debts first. 
• Negotiation: Speak to lenders about restructuring payments, lowering interest, or settling debts. Be mindful of the impact on your credit rating. 
• Seek Support: Professional advisers and debt charities can provide debt advice and debt support tailored to your situation, helping you negotiate repayments, explore debt relief options, and understand the potential impacts of different debt management strategies. 

Should You Remortgage to Pay Off Debt? 

Remortgaging can sometimes help clear debts by consolidating multiple payments into one. It may also allow you to benefit from lower interest compared to credit cards or loans. Remortgaging involves borrowing against your home and working with your lender to repay existing debts, which can streamline your finances. 

The benefits of remortgaging to clear debt in retirement:

• Simplified payments
• Potential for a lower interest rate
• You may find a better deal when remortgaging
• Easier to budget with one set payment a month 

Drawbacks of remortgaging to clear retirement debt:

• Extended repayment terms
• Higher lifetime interest costs
• Possible early repayment fees on your existing mortgage
• Risks of an early repayment fees if you pay off a fixed-rate deal early

Before committing, consider the long-term impact and always check terms carefully. 

Using Equity Release to Pay Off Debt 

Equity release offers a practical solution for homeowners over 55 who want to manage debt in retirement. Equity release is a loan secured against your home, and it is available as a home reversion plan or lifetime mortgage. 

Equity release allows you to release equity or release money from your home, giving you more money for debt repayment or other financial needs. Before proceeding with equity release, it’s important to consider the alternatives available to you as there are other options for managing debt in retirement, such as downsizing or seeking professional advice. 

Read more about using equity release to clear your retirement debt.

Eligibility and Requirements for Equity Release 

To qualify for equity release, you must be at least 55 years old and own a property worth £70,000 or more in the UK that serves as your main residence. The value of your property and the amount of equity you hold will determine how much you can release. Generally, the older you are and the higher the value of your property, the more tax-free cash you can access. This money can be used to supplement your pension income, pay off debts, or fund home improvements, giving you more disposable income in retirement. 

Before proceeding, it’s essential to consult an equity release adviser who can assess your personal circumstances and help you understand how equity release might affect your current circumstances.  

Using an equity release calculator can give you an idea of the maximum amount you could release, but professional advice ensures you make the best decision for your needs. Remember, releasing equity can impact your benefit entitlement, so careful planning is crucial to protect your financial wellbeing in retirement. 

Types of Equity Release Schemes 

There are two main types of equity release products available: lifetime mortgages and home reversion plans. With a lifetime mortgage, you are essentially borrowing against the value of your property, while still retaining ownership. The interest can be rolled up, meaning you don’t have to make monthly repayments unless you choose to make voluntary payments. This option provides a tax-free lump sum that can be used to pay off debts, such as credit cards or personal loans, or to fund home improvements. 

Alternatively, a home reversion plan involves selling a portion of your property to an equity release provider in exchange for a lump sum or regular income, while you continue living in your home rent-free.  

Each scheme has its own terms so it’s important to compare options and understand the implications before making a decision. Both types of equity release can help you access the value of your property to improve your finances in retirement but always consider the long-term impact on your estate and inheritance. 

Impact on State Benefits and Entitlements 

Releasing equity from your home can have a significant effect on your entitlement to state benefits, especially those that are means-tested, such as pension credit and council tax reduction. When you access a lump sum or increase your disposable income through equity release, it may reduce or even eliminate your eligibility for certain benefits. This is because the money you release is counted as capital or income, which can affect the calculations used to determine your benefit entitlement. 

Before making any decisions, it’s vital to speak with a financial adviser who can help you understand how releasing equity might impact your current and future benefits.

Using an equity release calculator can also help you estimate the amount you could release and the potential effect on your state benefits. Careful planning will ensure you can pay off debts and improve your financial situation without unintentionally losing valuable support from the state. 

Creating a Debt Repayment Strategy in Retirement 

Whether or not you choose equity release, a structured repayment plan is essential: 

1. List All Debts: Include mortgages, loans, and credit cards. 
2. Prioritise High-Interest Debts: Focus extra payments on these first, especially since credit cards charge high interest rates and fees. 
3. Use Tools and Calculators: Estimate repayment timelines and adjust accordingly. 
4. Seek Financial Advice: Ensure your strategy aligns with your retirement goals and benefits eligibility. 

To avoid paying unnecessary fees or charges, consider options like refinancing, transferring balances, or making partial repayments where possible. 

Retirees can also supplement their income by taking on flexible or occasional work and getting paid, which can help with debt repayments. 

Independent, whole of market advice you can trust  

Clearing debt in retirement is challenging but achievable with the right approach. Equity release can provide one pathway to financial freedom, helping retirees unlock the value of their home to reduce debt and ease financial pressures.  

At Bower Home Finance, we are independent, whole-of-market advisers who can help you explore all the options available. Because we are not tied to any single lender, we can search the entire market to find the right solution tailored to your needs. With the right advice and a clear repayment plan, you can take control of your finances and move toward a more secure and stress-free retirement. 

Find out how much equity you could release from your home using our free online equity release calculator.