How older people can deal with debt
Deidre Williams, a 72-year-old charity volunteer from Sussex, doesn't want to tell her children about her debt problems. In fact, she asked that her identity be changed so they wouldn't find out. Outwardly all seems well.
She has a nice house, and after running her own business for almost 30 years, she has retired and spends her time volunteering for charity.
But behind closed doors things are very different. When her husband died unexpectedly 10 years ago, her retirement plans went out of the window, and despite working to 67 she is still struggling to get by.
Although she can meet her monthly outgoings, each unexpected expense leaves her falling deeper and deeper into debt. Now, a few Christmases, a broken boiler and a failed MOT later, she owes £9,000, and is terrified her children will find out.
Deidre's situation is horrible, but she is far from alone. Part of the problem is that debt is now such a way of life for all ages that people are starting retirement with debts already hanging round their neck.
Aviva's Real Retirement Report in February found one fifth of 55 to 64-year-olds still owe more than £75,000 on their mortgage. Non-mortgage debt is growing too.
Rising costs and falling income
A survey this year by moneysupermarket.com revealed 51% of Britons over the age of 50 hold non-mortgage debt, averaging nearly £7,000 each.
Age Concern and Help the Aged found borrowers in their late 50s and early 60s owe on average at least four times as much in unsecured credit as their counterparts did a decade ago, and that a quarter of all people approaching state pension age have outstanding debts.
It is also increasingly likely that retirees are struggling to pay those debts. Last year, a record number of pensioners were plunged into insolvency, with the number rising faster than for any other age group - up 44% to 6,952.
It is expected to reach 8,000 this year. Tom Malone, a manager at the Consumer Credit Counselling Service (CCCS), says: "Over the last three years enquiries have rocketed among the over 60s. Last year it was the fastest-growing group of people needing help."
The problem is that pensioners are falling prey to a double-whammy of rising costs and falling income. The basic cost of everyday life continues to rise.
Inflation in December 2009 was 2.9%, but according to the Alliance Trust Research Centre, those aged 75 and over are experiencing a rate of 5.9%.
Aviva's Real Retirement Report reflects this, finding that the biggest worry for the over 55s is the rising cost of living (74%) followed by unexpected expenses (45%).
Meanwhile, income is failing to keep pace. Andrew Harrop, head of policy at Age Concern and Help the Aged, says: "While the basic state pension is due to increase by 2.5%, other elements of the state pension including the additional pension are due to be frozen at current levels."
Other sources of income are also struggling. The plummeting Bank of England base rate has meant the past year has been the worst on record for savers, with £3,500 put into the average savings account on 1 January 2009 having made just £29 in 12 months.
Meanwhile, income-producing equity investments are not making the income they once were.
A study by Capita Registrars found that British companies reduced their dividend payouts by £10 billion last year, at £56.9 billion, and the outlook for this year is weak too, at just £59.6 billion. This has been bad news for investors who rely on dividend income.
Worryingly, desperate times are leading to desperate measures. Many struggling pensioners are turning the heating down, or off, in order to keep costs under control, which may have serious health consequences.
Ways to combat debt
This is clearly untenable. Pensioners need a new approach. Fortunately there are alternatives. They can make a difference to both sides of the problem: income and outgoings.
Perhaps the biggest difference that can be made to income is to consider going back to work.
This may mean taking on part-time work in your chosen field, making money from a hobby, or even taking work in an area you have never explored before, such as retail. If working isn't practical or possible, pensioners can look to benefits and tax credits.
Another way to improve income is making the most of returns on savings. David Black, a banking specialist at Defaqto, says: "There are things that savers can do to boost their rates.
A proactive approach, by moving variable rate savings accounts to take advantage of things like introductory bonuses, would boost the returns for many." However, it's only worth taking this approach if you know you are organised enough to switch when the bonus period runs out.
For everyone else, it may be best to opt for the highest rate on offer without a bonus.
Most of the highest interest rates at the moment are on fixed long-term bonds. This is a trickier area. Clearly the extra interest is valuable, but beware of tying your money up.
The experts agree that interest rises are on the cards within the next year or so, and if you're not careful your money could be stuck earning a comparatively disappointing rate of interest while the rest of the country sees their income rising again.
It's also worth considering the tax on savings. Don't overlook individual savings accounts. The rates of these have suffered along with other savings rates, but you have the advantage of no tax on interest.
Look at your expenses
After working on your income, you need to examine your expenses. Start with the changes you can make, which will make no difference to your lifestyle - paying less for everything. This includes everyday basics like groceries.
There are a number of steps to cutting your grocery bill. Jonny Steel, marketing insights manager with mysupermarket.co.uk, says it's worth considering shopping online once a week, so you aren't tempted by things you don't need.
He also suggests downshifting, trying supermarket own-brand versions of the branded products.
Next, look at cutting the cost of bills like utilities. Gareth Kloet, head of utilities at Confused.com, says you should shop around to make sure you are on the cheapest tariff possible, using comparison sites like his or uswitch.com.
In addition, it's vital to take advantage of everything on offer from your utilities provider such as the Priority Services Register.
All major energy suppliers are obliged to offer free services to some customers through this scheme, so contact your energy supplier to find out if you're eligible. You should also check whether you fall into the fuel poverty category.
If you believe that you spend 10% or more of your annual income on energy bills, it's likely that you are eligible for additional assistance from your energy supplier.
You can also cut your bills by setting up a direct debit, which will reduce costs by 10% or more. And you can consider signing up for dual fuel (buying gas and electricity from the same provider) to bring the cost down again.
They will be able to negotiate with anyone you owe money to, and arrange a repayment schedule. Free services should offer everything you need. Some people, however, use a commercial debt management firm.
If you opt for this route, you need to be careful, because the scope of these firms falls outside of Financial Services Authorities regulation, and there are some unscrupulous providers around.
There are a number of things to watch out for, including their charges, and how long it will take for you to pay off the debt. Also ask yourself what you will get from them that you can't get from a charity. The answer to that is highly likely to be: nothing.
If a debt repayment plan isn't enough, you may need to consider unlocking some of the value in your home. This may mean selling up and downsizing, or where this isn't practical, it may mean equity release.
Clearly this is a growing crisis. For some there will be no alternative to bankruptcy. However, there are many cases where something can be done.
Malone says: "For the vast majority of people we can do a budget with them, arrange a debt management scheme, and get them back on track." The key is not to think you are on your own.
There are plenty of professionals out there offering free help and advice, who will help you get out of financial difficulties and get on with enjoying your retirement.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.