How to manage debt in retirement

How debt affects finances in retirement

Debt in retirement is a growing issue. The Department for Work and Pensions reports that single pensioners had an average income of £282 per week in 2024 - around £1,220 per month. This means that even relatively modest debts can place significant pressure on day-to-day living standards.

While precise figures on total secured and unsecured debt held by over-65s are not published separately, broader measures point to the scale of the challenge. By late 2024, UK household debt overall had risen to 118% of disposable income, highlighting the wider pressures for many - including retirees.

While many older borrowers remain optimistic, others face challenges in managing their debts, underlining the importance of realistic planning and financial advice.
 

What causes debt in retirement?

Many people can find themselves slipping into debt in retirement. Knowing the common causes makes it easier to prepare and take action early.

Lack of planning

It can be difficult to prioritise retirement savings. You might feel there are other, more immediate expenses to focus on, meaning there simply isn’t enough money to build a proper retirement fund. This is likely to create a sharp drop in income once you reach retirement. It could also mean you create new debts or struggle with existing ones, such as your mortgage.

Poor pension management

The introduction of pension freedoms in 2015 made it possible to withdraw all of your pension fund when you reach the age of 55. While this isn’t always a bad thing to do, depending on personal circumstances, it can lead to a shortfall later on. Now people are living longer than previous generations, retirement income needs to stretch further. Managing your retirement income properly is essential.

Unexpected events

Not everything can be planned for. Sometimes an unexpected life event means spending more than you budgeted for. This might include:

• Divorce

• Household repairs

• Illness

• The death of a loved one

• Earlier than expected retirement

These can be stressful circumstances that could create a heavy financial burden. A lack of sufficient savings may mean debt becomes the only option.
 

How to pay off debt in retirement?

Being ready to retire is more than simply being ready to stop working. Most will experience a drop in income once that last pay cheque has been spent and debt repayments are one thing that can seriously put a strain on your savings.

If you can, and it’s the most suitable option for your situation, paying down debt before retirement can free up more of your income for the things you truly value and bring greater peace of mind. However, it’s never too late, so why not check these ways to pay off existing debt in retirement.

Boost your income

In recent years, the number of people aged 65 and over in employment has reached record highs, reflecting a steady long-term trend of older adults staying in or returning to work to supplement their retirement income.

However, if working full or part-time isn’t for you, there are other ways. Check you are claiming everything you are entitled to, such as pension credits. You could look to sell unwanted goods in your home. If you have the space, perhaps taking on a lodger or renting out a room for storage might fit in around your circumstances and bring in some extra cash.

Cut back and prioritise

Not all debts are the same. Start by writing down a list of everything you owe and prioritise how to pay it back - picking the debt with the highest rate of interest first.

If possible, look to transfer any balances to 0% deals - but make sure you pay it all by the end of the term or else the interest may rocket.

Look in your budget for where you could cut back - switch energy supplier, insurance company or phone provider to ensure you’re on the cheapest rate. Any savings you make can be used to pay down your debt.

Consider downsizing

If you’re a homeowner, one option could be to downsize to a cheaper property, raising the funds to pay off your debt.

This is really one to consider carefully, as the costs of downsizing can also be considerable, so ensure you take into account estate agents fees, stamp duty, legal costs, removal services and any work that needs to be done to your new property.

Downsizing will depend on your personal circumstances, as well as how much you owe.
 

Paying Off Debt in Retirement FAQs

 

What is the average debt of a retiree?

There isn’t an official published figure for the “average debt” held by retirees, but it’s not unusual for people to have ongoing financial responsibilities in retirement. With one in three pensioners (around 4.1 million people) saying they feel less financially secure than they did a year ago.

Everyone’s situation is different, so it’s important to seek tailored financial advice before making decisions.

How to manage debt when retired?

Paying off debt in retirement often involves a combination of strategies, such as budgeting, boosting income (for example through benefits or part-time work), or consolidating high-interest debts. Some people consider equity release to repay their existing debts, but it’s vital to speak with a qualified equity release adviser first, as it is also a form of borrowing and isn’t right for everyone. Professional guidance can help you weigh all your options.

Can you retire with debt?

Yes, you can retire with debt, but it may affect your financial security and lifestyle in retirement. Carrying debt - whether from credit cards, loans, or a conventional mortgage - means part of your retirement income will go toward repayments, potentially reducing your disposable income. It's important to explore all your options and seek professional advice to manage debt effectively before or during retirement.

Is it smart to pay off debt with retirement savings?

This depends on personal circumstances. Using retirement savings to clear debt might be the best option for some, but it could also reduce future income and affect long-term financial security. It’s beneficial to weigh up the pros and cons with a regulated financial adviser before making any decisions.
 

Release equity from your home

For homeowners, one of the biggest assets in retirement is often the property itself.

At Key all our equity release advice relates to lifetime mortgages, a loan secured against your home. With a lifetime mortgage you could unlock some of the value tied up in your home as tax-free cash to help clear existing debts or cover essential costs, without the need to move. However, you should always think carefully before securing a loan against your home to repay existing debt.

Unlike most loans, a lifetime mortgage doesn’t usually require monthly repayments. The amount borrowed, along with compound interest, is typically repaid from the sale of your property when you pass away or move into long-term care. This can be an option for homeowners who are asset-rich but have limited income.

Our fixed advice fee of £1,699 is payable on completion of a plan. Find out more by downloading our free guide to equity release.
 

Be financially aware
Compound interest means the amount you owe can grow quickly. Equity release reduces your estate's value and may impact means-tested benefits. It may leave little or no property equity, reducing future financial options.
 

Seek professional help

If your debts are keeping you up at night and you feel like you cannot manage, there are a number of debt charities or professional bodies that offer advice, such as StepChange or Citizens Advice.