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What to do if you’re retired and in debt

James Daley - Fairer Finance founder and Managing Director.

James Daley

Money expert and Founder of Fairer Finance

Last updated 3rd April 2020

Whatever stage of life you’re at, it’s important to have an achievable plan to pay down any debt you owe.

But if you’re one of the growing numbers of people who still owe money when you’re in retirement, the choices available to you will be slightly different to those you had during your working life.

Getting a regular mortgage, for example, can be harder work – as many lenders have maximum age limits. And the older you are, the harder it can be to get accepted for a personal loan or a credit card.

The good news is that with more and more people needing some financial flexibility in retirement, there’s a growing number of options available.

Making the most of your pension

If you’ve got a workplace pension, you’re allowed to withdraw up to 25% of it tax-free when you retire. Many people use some of this tax-free lump sum to pay off loans – and it could prove your ticket out of debt.

Remember, however, that the main purpose of your pension is to provide a long-term income to last you through your retirement. So the more of your lump sum you use to pay down debts, the less you will end up with in terms of a regular income.

It usually makes sense to prioritise paying down debts – but make sure you work out how much income you’re sacrificing, and how much you’re saving on your debts. If your borrowing is on a 0% credit card, for example, and you can afford to make the monthly repayments, you’ll be better off paying down the debt month by month rather than using your lump sum to pay it off in one go.


Make sure you’ve got what you’re entitled to

Once you reach retirement, you’ll qualify for a state pension – but you may also qualify for other benefits and perks. You’ll get a free bus pass, for example, and you may be entitled to top ups to your state pension via pension credit if you’re on a lower income.

You may also be entitled to other benefits if you’re less mobile and need extra support around the home.

You can find out more about benefits that you may be entitled to in retirement on the Money & Pensions Service website.

Getting your debts under control

Once you reach retirement, your income should be relatively steady. As well as the fixed monthly payments you receive from your state pension, hopefully you’ll also be drawing a regular income from a workplace pension.

But if you’re still carrying debt in retirement, the repayments can eat into the money you’ve got left for the essentials like food and bills.

1. Basic budgeting exercise

As a starting point, it’s worth doing a basic budgeting exercise, listing all your regular outgoings – including bills, debt repayments, and regular monthly spends on essentials like food. Don’t forget to add in the irregular bills that come around less frequently – such as insurances which you might only pay once a year.


2. Income vs. spending

Once you’ve got your tally, you can work out whether you’re managing to keep within your means, or if you’re spending more than you’ve got coming in.

If you’ve got surplus income, it may make sense to use some of this to pay down more of your debt each month. Once your debts have been paid off, you’ll be free of those debt repayments and able to spend that money on something else each month.

If you’re already struggling to keep within your means, you’ll need to make a plan for getting back within your budget.


3. Review your debts

As a first step, you should check to see whether you could get a better deal on the debt that you do have. It makes sense to do this even if you are balancing your household budget each month.

If the debts you owe are on credit cards, or personal loans, you may be able to switch them to lower rates. Some credit cards charge no interest at all for well over a year – although you need to watch out for the fees, which can be as high as 4%. You may also be able to get a lower rate on a new personal loan.

If lower debt repayments are unlikely to put you back in the black, you then need to go through every single line of your monthly expenditure to see if you can cut down some of your bills or other regular outgoings.


4. Cut down expenses

Often you can make relatively painless savings by switching your utility or insurance companies. Next, take a look at some of your non-essential spending and see if there’s anything that’s easy to give up – for example, cable TV or magazine subscriptions.

Once you’ve pared your spending back and got your debt payments down as low as possible, hopefully you’ll be back within a budget that balances each month – and ideally leaves you with a little extra to put aside for emergencies.

But if you’ve cut down all the expenses you can and you’re still struggling to spend less than you’re earning, there are other options to consider.

Releasing money from your home

If you own your own home, you may be able to release money from your house to pay down your debts. Perhaps the simplest way to do that is by selling the home you live in today and buying a smaller and cheaper one somewhere else – leaving you with some cash to pay down your debts.

But if, like many people, you’re attached to the family home and don’t want to move, there are still other options that can help you raise the money you need, and keep you in your own house.

A number of standard mortgage lenders have begun to increase their age limits in recent years – so one option may simply be to remortgage your property. This is only worth doing if the mortgage borrowing works out cheaper than your current debt repayments – as you’ll still need to be making repayments towards your mortgage every month.

If the sums don’t work for a regular mortgage, you could also look at using “equity release”.

Equity release

Equity release products allow you to release some of the value in your home without having to make regular repayments if you don’t want to – or can’t afford to. The most common type of equity release product is called a “lifetime mortgage” – where the interest is added to the loan and is all paid off when you die, or sell the property.

The other type of equity release plan is called a “home reversion” scheme. These allow you to sell a proportion of your home and continue living in it. When you die, or sell the property, the equity release provider gets back the percentage that they’ve bought, and your estate (the people you’ve left your money to) gets the rest.

What to consider

Equity release can be a good way to pay down your debts in one go, and free yourself up from the regular repayments. It can also be a good way of borrowing for one off expenses, such as renovations to your home.

But beware that equity release means there’ll be less left to leave to your family when you die. In the case of a lifetime mortgage, you could end up with all the value in your home being owed to the lender if you live a long life.

Some equity release deals also allow you to make repayments, so that you slow down the rate at which your loan builds up – protecting more of the equity in your home to pass onto your loved ones when you die.

If you are considering getting equity release, it’s vital you get independent financial and legal advice to make sure you pick the best option, and consider all the pros and cons.

SunLife offers an equity release service for free initial advice – call 0800 633 5566. This is an initial advice service with expert advisors, however you should also seek independent advice.

Earn some extra income

For many people, retirement is the reward for a hard-working life – a chance to rest, relax and do more of the things you enjoy. But if you’re still fit and healthy, one obvious option to get on top of your debts is to do some occasional paid work to top up your pension income.

You may not want the demands of the 9 to 5, but there are plenty of flexible jobs that may allow you to work for a few hours a week and top up your pension income.

Asking for debt support in retirement

Not everyone is able to carry on working in retirement. And if you don’t own your own home, then equity release will not be an option.

If you can’t bring down your expenditure below your monthly income – and you’ve exhausted all other options – you’ll need to look at getting professional debt advice.

Charities like Stepchange and National Debtline provide free to use advice services, which can help you get back on track.

They may be able to negotiate with the companies who you owe money to – to reduce your monthly repayments, or even to get them to write off some of your debts.

They’ve helped hundreds of thousands of people in the UK – and they offer a supportive, non-judgmental service. If you’re struggling to get on top of your debts, the earlier you put in a call for help, the easier it is to set things right.

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Here's the information that you need to know about who we are and the other companies that we work with in order to provide our products and services.

Who are SunLife and who provides the SunLife Guaranteed Over 50 Plans?

SunLife Limited distributes financial products and services , registered office: 1 Wythall Green Way, Wythall, Birmingham, B47 6WG, United Kingdom (registered in England and Wales, no. 05460862). SunLife Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (registration no. 769427).

Phoenix Life Limited trades as SunLife and is the provider of the SunLife Guaranteed Over 50 Plan life insurance policies. Phoenix Life Limited’s registered office is at 1 Wythall Green Way, Wythall, Birmingham, B47 6WG, United Kingdom (registered in England and Wales, no. 1016269).

Who provides the Funeral Benefit Option?

If you choose to add Funeral Benefit Option to your Guaranteed Over 50 Plan, Dignity Funerals Ltd arranges and provides the funeral services, registered office: 4 King Edwards Court, Sutton Coldfield, West Midlands, B73 6AP (registered in England and Wales, No. 00041598). Dignity Funerals Ltd is a member of the National Association of Funeral Directors.

Who provides the Funeral Plans?

Dignity Funerals Ltd arranges and provides the funeral services, registered office: 4 King Edwards Court, Sutton Coldfield, West Midlands, B73 6AP (registered in England and Wales, No. 00041598). Dignity Funerals is not authorised or regulated for this activity by either the Financial Conduct Authority or the Prudential Regulation Authority. Dignity Funerals Ltd is a member of the National Association of Funeral Directors.

The life insurance policy that pays for your funeral will be provided by Phoenix Life Limited, trading as SunLife.

Who provides SunLife Pet Insurance

SunLife Pet Insurance is arranged and administered by BDML Connect Limited. BDML Connect Limited is authorised and regulated by the Financial Conduct Authority (No. 309140). Registered in England and Wales Number 02785540. Registered Office: 45 Westerham Road, Bessels Green, Sevenoaks, Kent, TN13 2QB.

Who provides SunLife Home Insurance

SunLife Home Insurance is arranged and administered by BISL Limited and underwritten by a panel of insurers. BISL Limited are an intermediary authorised and regulated by the Financial Conduct Authority. Registered in England no. 03231094. Registered office Pegasus House, Bakewell Road, Orton Southgate, Peterborough PE2 6YS.

Who provides SunLife Car Insurance

SunLife Car Insurance is arranged and administered by BISL Limited and underwritten by a panel of insurers. BISL Limited are an intermediary authorised and regulated by the Financial Conduct Authority. Registered in England no. 03231094. Registered office Pegasus House, Bakewell Road, Orton Southgate, Peterborough PE2 6YS.