Bob Champion looks at retiring earlier than expected, something labelled as an "unwelcome drama" by some due to their debt levels. Could equity release be the answer?
A recent survey by Just Group of more than 1,000 retirees aged 55 and above, found that 47% had retired earlier than intended. Some 43% had retired when they expected and 9% retired later.
Among that 47% who retired early, there were some positive reasons – 25% retired because they had a larger pension fund than they anticipated; 2% received an inheritance; and 2% retired because their partner continued to work longer than expected freeing them up to retire.
There were also negative reasons such as 33% were forced to retire early due to poor health; 15% had been made redundant and were unable to find another job, whilst 8% were forced to stop work to care for a relative.
In any year about 650,000 people retire. If the survey findings are accurate over 305,000 retire earlier than expected each year. Just over half (53%) of those (around 162,000) retire early in circumstances that could be a financial shock, ill-health, redundancy or becoming a forced carer.
Currently, these numbers could be higher because of the impact Covid has had, and is having, on the job market and individual health. Therefore, what should an individual focus on when they are forced to retire early with no expectations of a return to work?
First things first
Many people would say their retirement savings and how to turn their pension into income. Although this is important I believe there is another financial issue that is as important if not more important. Debt.
If the expectation is that employment is going to continue into the future for several years more, there could be cars, home improvements and other debts that have not been fully repaid. The situation could be worse if the mortgage is still outstanding. How will these debts be paid off? Should they all be paid off?
If you now look at retirement savings then retiring, even a short period early, can result in a large shortfall in retirement income. Each year earlier than planned can make a great difference. That year means investment growth on the income drawn is lost, future contributions and investment growth on them are lost; and the number of years the income drawn must make up for no state pension is increased.
Drawing unnecessary income to service and pay off debt has two drawbacks. Firstly, if too much income is drawn too early, it reduces the future income available if that income is going to be sustainable for the remainder of life. Secondly, if income tax is payable on the income drawn more income must be drawn to pay that tax. Adding to the problem of drawing too much income too early.
That is why tackling debt is important. Consolidating debt into a mortgage, converting to an interest-only mortgage; and the use of an equity release mortgage could all be considered. The objective is to reduce outgoings until the state pension kicks in.
While all those who qualify for PensionsWise should take advantage of the free service that is available, those with outstanding debts should also receive guidance as to what their options are. It will be the combination of their lending and pension options that will contribute to the solution that is come to.
Everyone will be in a different position. The retirement solution could involve later life lending and pension advice tailored to their circumstances.
In the survey, 48% of respondents said retiring earlier than expected was an ‘unwelcome drama’. The correct holistic guidance and advice at the beginning of their retirement journey could avoid further unwelcome dramas later into their retirement.
Bob Champion is chairman of the Air Later Life Academy
