Mortgage debt is emerging as a significant concern for people approaching retirement, with new Standard Life research suggesting many see the transition as an opportunity to simplify their finances and reduce outstanding borrowing.
The study, conducted among people aged 55 to 70 with a defined contribution pension, found 90% of those yet to retire want their finances to be as simple and straightforward as possible before they stop working.
More than half of respondents, 54%, said they viewed retirement as an opportunity to reset their finances, while debt repayment was a priority for many as they approached the end of their working lives.
Four in five, 81%, said paying off debts before retirement was important, while 57% of respondents overall were worried about having a mortgage during retirement.
The concern was considerably higher among existing mortgage borrowers, with 73% worried about carrying their home loan into retirement. Among mortgage holders who had not yet retired, 68% said clearing their mortgage was a priority.
The findings also suggest debt repayment is influencing decisions about how pension savings are accessed. Of those who had taken a tax-free lump sum from their pension, 24% had used at least some of the money to clear or reduce debts, while 14% had used it to pay down their mortgage.
PENSIONS USED TO SIMPLIFY FINANCES
Alongside its polling, the Standard Life Centre for the Future of Retirement carried out qualitative research examining the decisions, emotions and behaviour of people with defined contribution pensions.
Its Decisions in the dark report found the idea of retirement as a financial reset was a recurring theme, with some participants also using the period as an opportunity to consolidate pension pots.
Standard Life said feelings about retirement finances were mixed. Half of respondents said they felt confident about pension decision-making compared with 34% who felt confused, while 58% described themselves as hopeful and 33% said they felt scared.
Catherine Foot, director of the Standard Life Centre for the Future of Retirement, said: “The thought of retiring, and the process of doing so, can bring up strong emotions, and these feelings often shape how people manage their finances.
“For many, there’s a powerful desire to enter retirement free from debt, which can heavily influence the decisions they make.
“More and more of those approaching retirement are using Defined Contribution pensions to fund their spending. Unlike previous generations who had the simplicity and certainty of a Defined Benefit pension, these DC retirees need to make active decisions about how to make the most of their money.
“Regulation and the industry’s ability to support people through this period is beginning to catch up with the introduction of new innovations such as Targeted Support and plans for Guided Retirement.
“These initiatives will help providers suggest potential courses of action or offer people a retirement income option that reflects the range of their needs.”
USING PENSIONS TO REPAY MORTGAGES
Foot cautioned that using pension savings to remove debt would not necessarily be the right approach for every borrower, particularly where mortgage costs need to be weighed against potential returns on retirement savings.
She said: “The decision of whether to use your pension to pay off debts is a complex one and the right course of action will depend on the individual. For those with high interest unsecured debts, using savings to clear debt could make sense.
“Decisions around mortgages can be more complex as much depends on whether you expect your pension and savings to generate returns beyond the interest you’re paying and factors like whether you expect to receive an inheritance or other lump sum.
“The trade off in both cases is that savings you may have planned to fund your retirement are spent early leaving less to fund what can be a long period.”
