Four in five say paying off debts is important before retiring

New research from Standard Life has found that among those aged 55-70 with a defined contribution pension found 90% of those yet to retire want to have their finances as simple and straightforward as possible before retiring, whilst over half of all those aged 55-70 with a DC pension (54%) view retirement as an opportunity to reset their finances.

Four in five (81%) say paying off debts is important before retiring. Among mortgage holders, the findings were pronounced, with 73% worrying about having one in retirement and 68% of those yet to retire saying paying off their mortgage was a priority.

The desire to be debt-free is, in many cases, driving major pension drawdown decisions, with 24% who took a tax-free lump sum using it to clear or reduce debts and 14% using it to pay down mortgages.

In addition to the polling, the Standard Life Centre for the Future of Retirement’s report Decisions in the dark used in-depth qualitative research focusing on decisions, emotions and behaviours of people with Defined Contribution pensions as they navigate a changing retirement landscape. (2) The theme of a reset or opportunity to simplify their finances was a consistent discussion point and many of those interviewed highlighted that they’d used it as a chance to consolidate their pensions too.

The polling found that retirement finances and pensions in particular generate mixed feelings among those around retirement age. While there is a degree of trepidation, respondents tended towards optimism, in what is an exciting life stage. On pension decision-making, 50% feel confident, compared to a third (34%) who feel confused, whilst 58% feel hopeful compared to 33% who feel 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.

“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.”