It makes sense to try and pay off debts as you near retirement. In fact, it’s a great 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.
Here are a few things you should also consider:
- You may have to pay a penalty if you repay your debt early. If an early repayment penalty applies, it may be best to maintain the debt, at least until the penalties no longer apply.
- If you've locked your money into a fixed-rate deal, you could earn more if you’d invested it. Assuming you don’t have to take risks with the money you invest. This isn’t something that would happen often, but is possible.
- If you can’t pay off all your debts by the time you retire, target the ones with the highest interest rate, as they’ll cost you the most in the long-term.
- You may be able to take a tax-free lump sum from your pension savings, to pay any remaining debt when you do retire. Taking a lump sum is likely to reduce your overall pension benefits at retirement.
When you reach age 55 a range of pension options will be available to you, each of the options are available to view here.
These are the options we offer. They may differ to other products and it's important to consider your own retirement needs.
The value of any tax relief depends on your individual circumstances. This information is based on our understanding of current, taxation law and HM Revenue & Customs (HMRC) practice, which may change.
This content is general high level information only and shouldn't 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.