Avoiding Retirement Poverty
Updated: 21st September 2016
We’re often told that we must save for retirement. The alternative is the risk of facing decades of living barely above the poverty line on a state pension. Most people understand how important this is and desperately want to save, but for many people it’s simply impossible to be able to make substantial contributions to a pension. This is particularly the case for people who are servicing a high level of debt, and more especially so when the repayments are barely affordable without the continual use of other credit sources.
This article is written for the benefit of a reader that knows that their debts have become a problem, but who is yet to seek out advice. It may also be of benefit to those currently using a debt solution to deal with their debts and to earn a fresh financial start. The article isn’t financial advice though, and anyone seeking to get personal advice on a pension is advised to seek one-to-one advice from a pension professional.
Many people with serious debt concerns have no ability to contribute to a pension. Often they’re making just minimum payments on their credit cards, which can mean that the cards will take decades to clear. This could mean decades during which no retirement saving is possible.
Speaking to a debt adviser at this stage makes good sense. They may be able to help you to re-budget and bring everything back under control. If that isn’t possible, it may be that unsustainable financial situations can be addressed with measures such as trust deeds, debt arrangement schemes, or even sequestration. These options are, of course, a very serious step to take. Despite this, for many people the alternative is to continue to try to repay a burden of debt that is already unmanageable.
For the sake of example, let’s say that a thirty-seven year old man with £25,000 of bank loans and credit card balances is repaying £600 per month to his creditors. He can’t really afford £600 of repayments each month so his overall debt level is creeping up over time. A debt adviser calculates his real disposable income to be £200; this is the amount that he can actually afford towards his debts each month while still paying all of his essential bills and expenses.
Without taking action he has £400 more going out than coming in each month, which will mean he’ll sink further into debt over time (or lose access to cash for basic needs altogether at some point). £15,000 of the debts are on credit cards, which will take twenty years to repay in full as only minimum payments are being made.
Clearly in this case no retirement saving will be possible unless it is actually funded by new credit (which is unsustainable). As well as facing decades of debt repayments that aren’t really repaying the overall debts, a future of a relatively meagre state pension awaits unless action is taken soon.
If this thirty-seven year old man is advised that a protected trust deed suits his needs, he might expect to pay £200 per month to the trust deed, and to be free of unsecured debt after four years. Therefore, at the age of 41, this individual would then become able to save £200 per month into a pension. Would this eventually add up to a significant sum?
According to one pension calculator, a 41 year man saving £200 per month (plus tax relief) until the age of 67 (without any employer contribution) might have a total pension pot of around £114,000. This could make a huge difference to his living standard once added to a state pension.
How about if a 47 year old woman began a trust deed in Scotland on the same terms? Her £200 pension saving (plus tax relief) from the age of 51 could produce a pension pot of £60,000 if she retired at 67.
The young would benefit especially, as their savings have more time to accumulate and grow. A 27 year old man in the same situation described previously, who saved £200 per month into a pension once his trust deed had finished (aged 31) might have a pension pot worth £185,000 by the time he reached 67 years old.
These figures may also be of interest to those that are currently working through their trust deed. You might have the opportunity to make hugely important financial decisions that will improve your future once your trust deed contribution ceases and you have this money spare each month.
The logic doesn’t apply just to pensions. Persons with interest-only mortgages might be able to switch to repayment mortgages once their debts have been dealt with. This could make a huge difference in retirement if their home was now owned outright with no mortgage.
Failing to deal with problem debt can have serious long-term consequences. A lack of any ability to save for retirement, or an inability to clear a mortgage, might make your retirement years a disappointing and difficult experience. The same applies to those completing trust deeds. Missing this opportunity to plan for the future financially might well be regretted later.
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