THE dream of a debt-free retirement is becoming a distant one for many Scots as mortgage and credit card repayments pile up.
People in or nearing retirement north of the Border are increasingly likely to be burdened with debt and forced to dip into their savings to get by, new research reveals.
While over-55s are seeking to bolster their savings cushions, according to the latest Aviva Real Retirement Report, the effect of inflation on savings pots and fixed pensioner incomes has been telling.
The average over-55s household net income north of the Border has risen by just £21 since last year, reaching £1,628, although it has fallen again since the start of 2013.
Meanwhile, monthly living costs for those households have jumped by 7 per cent in two years, according to Aviva, reaching £1,279 last month.
The report echoed recent research by MGM Advantage which found that four in ten pensioners in Scotland are in debt by an average of almost £18,000. It said 15 per cent of Scottish retirees are still clearing mortgages, owing an average of £66,000, while 12 per cent have non-mortgage debts worth more than £5,000.
The bleak debt predicament is widely blamed on the rising cost of living. But other factors have driven up pensioner debts too, according to Derek Stewart, managing partner at Glasgow-based Sam Wealth.
“The failure of endowments has caught a large number of people out, especially where they thought they would have cleared their mortgage and possibly have a surplus to spend,” said Stewart. “They now find themselves with a shortfall to pay off and haven’t made provision for that.”
Some are also paying the price for taking out easy credit in the expectation that property values would continue rising, he added.
Pensioners with fixed incomes have also been hit hardest by the dramatic decline in savings rates since the base rate bottomed out at 0.5 per cent more than four years ago. Returns on cash accounts have shrunk even further in recent months, delivering yet another blow for the many pensioners who depend on savings income to supplement the meagre state pension.
“It seems ironic that those who have been prudent over the years have been hit the hardest,” said Stewart. “They have saved hard all their lives, been frugal and are now losing money in real terms as interest rates are below the rate of inflation.”
But there are ways of easing the pressure on your finances, even in retirement.
Understand your finances
Set out a budget so you can see what you’ve got and where it’s going. Break the spending down into essential (such as mortgage and household bills) and discretionary, compare it with your net income and see what you can reduce.
If you haven’t switched energy supplier recently you could make significant savings by transferring to a cheaper dual-fuel online tariff.
Prioritise your repayments
Write down how much you’re being charged on your loan payments and focus on clearing the most expensive first (such as a payday loan, or a store or credit card).
Make your money work harder
Keep track of the returns on your cash accounts and ask yourself if the capital can be better deployed elsewhere, Stewart suggested.
“If you are getting 1.5 per cent on a cash deposit but are paying 28 per cent on a credit card, for example, then pay off the credit card,” he said.
Make sure to keep some cash easily accessible in case of emergencies, however.
Review savings and investments
Look at what you’re getting from your cash deposits and any investments to make sure they’re producing the goods. If not, see if you can get a better rate of interest or dividend elsewhere.
“If you are prepared to take a higher rate of risk then you may be able to improve your income, but make sure the risks are explained to you,” said Stewart.
Also make sure you’re using your annual individual savings account (Isa) allowance, currently £11,520 (up to half of which can go into a cash Isa).
Don’t be over-cautious
If you have a cash cushion, you could consider taking on extra risk with some of your investments, said Alastair Robson, director of Edinburgh IFA Robson Macintosh.
“There is nothing over and above cash that does not carry an element of risk, but if inflation remains above the rates of deposit then most people’s capital is being eroded anyway,” he added.
“Putting a small proportion of capital into some slightly riskier assets will help generate more income or capital growth.”
He suggests generating income by investing in naturally yielding assets such as equity income funds, high-yield or strategic bonds funds or commercial property funds.
It’s not easy to find work in the current climate and the idea may not appeal, but the income from a part-time job could provide breathing space.
More than four in ten over-55s in Scotland are in paid employment, up from 32 per cent last May, said Aviva, including many past the state pension age. Watch out for the possible implications of a new income on tax and state support.
Track down what you’re owed
Some £3 billion lies unclaimed in forgotten or lost pension pots, usually where members have changed jobs without transferring their pension.
You can locate a lost pension through the government’s free pension tracing service. Call 0845 6002 537 or visit www.gov.uk/find-lost-pension
Get what you’re entitled to
Up to 1.6 million people fail to claim pension credit payments each year, according to the Department for Work and Pensions. Find out if you’re missing out on state payments at www.turn2us.org.uk/
Use your home
From renting out a room to downsizing or taking out an equity release plan, there are ways to unlock cash from your property.
Downsizing can free up capital and provide extra income, while income from renting out a room is tax-free up to £4,250 a year. Equity release is an increasingly popular way of accessing the capital tied up in property without moving out of it. However, it can be complex and professional advice is essential.