It generally makes sense to try and pay off debts as you near retirement. In fact, it’s usually a sensible idea to pay off debt at any stage in your life.
The logic behind this is simple. Usually, the interest you pay on your debt is likely to be higher than you could achieve by investing your money…unless you’re prepared to invest in riskier investments. Please note, the value of an investment, and any income from it, can fall as well as rise and isn’t guaranteed. You could get back less than you originally invested.
There are a couple of possible exceptions to this general rule:
- If repaying debt early means you might have to pay penalties. In some cases, early repayment can trigger an additional payment that may make it worthwhile maintaining the debt (at least until any penalties no longer apply).
- If you’re locked into a great fixed rate deal and your money could earn more if you invested it. Again, this assumes you don’t have to take risks with the money you invest. This isn’t something that will happen often, but it is possible from time to time.
One more point worth bearing in mind. If you can’t pay off all your debts by the time you retire, pay off the debts which are costing you most. Not in terms of your monthly repayments you make, but the interest rate you pay.
Finally, don’t forget that you may be able to take a tax-free lump sum from any pension savings you have and you could use this to get rid of any remaining debt when you retire (though remember taking the tax free lump sum is likely to reduce your overall pension benefits when you retire).
There are also other pension options available to you when you reach 55. A summary of each option is available to view here.
It's important to remember that these are the options that Aegon offers. There may be others that would be more suited to your needs. Alternatively, if you are some time away from retirement, you can wait and decide later.
The value of any tax relief depends on your individual circumstances / the individual circumstances of the investor. This information is based on our understanding of current, taxation law and HMRC practice, which may change.
Note: This content is general high level information only and should not be interpreted as recommendations or advice. Because the circumstances of each reader will be different and not known to us we recommend that tailored advice from an expert is sought. There may be a charge for financial advice.