Addressing the debtly hallows

Clive Bolton discusses the findings of the recent Aviva Real Retirement Report – fears over retiring with debts is one of them

In decades gone by, the over-55 population was often ­(mistakenly) considered as one ­homogenous group, with the main distinction being that some were working and some were retired.

Fortunately, the world has evolved. We now recognise that Jane Seymour (60), Ozzy Osborne (62), Cher (64) and Robert De Niro (67) may be similar ages, but they are all very different.

Financial services need to move in the same direction. At Aviva, we created the Real Retirement Report to understand more about this population group and their financial pressure points.

Since the launch of this piece of tracking research in February 2010, it has become apparent that the over-55 population fits roughly into three categories: the pre-retirees (55-64), the retiring (65-74) and the long-term retired (over 75).

Yes, there are some exceptions (I would challenge anyone to tell Ozzy he was a pre-retiree), but from a ­financial perspective, these categories are generally accurate. So what are the pressure points for these groups and what do advisers need to know? 

Income and inflation

Our most recent report showed that the average incomes of this group are failing to keep track of inflation. Indeed, they fell by 4% from £1,284 in Feb 2010 to £1,236 in Feb 2011 while inflation topped 5%.

We are currently seeing higher rates of inflation than we have seen for some time, but this does hit home the importance of ensuring that this market force is built into a client’s retirement planning.

House prices have been unstable for the last few years, but this group – probably due to the type of home they own – has actually seen the value of their homes increase from £232,985 in Feb 2010 to £235,590 in Feb 2011. However, while this is welcome news, mean mortgage debt has soared by more than £10,000 – ­rising from £54,567 in Feb 2010 to £65,107 in Feb 2011.  

This seems to contradict the ­recent Bank of England figures, which showed that homeowners ­repaid a record £7bn in the final quarter of 2010.

But I suspect that many over-55s could simply not afford to do this. They face many other financial pressures such as helping out family members and meeting the increasing cost of day-to-day living – often from a relatively fixed income. 

However, this does bring us onto another interesting topic: debt in retirement.
The role of debt

Today’s over-55s are the first g­eneration that has benefited from years of easily available credit. While debt, when used ­responsibly, can greatly enhance a person’s ­lifestyle, it does have the drawback in that it does need to be repaid.

Consequently, if circumstances change and calculations have not been accurate, life can become very difficult to manage.

One third of all over-55s have at least one form of unsecured debt with credit cards (30%), personal loans (13%) and overdrafts (10%) being the most popular types of borrowing. The average credit card debt is £3,331 or almost three times the average income for this group – a worrying fact considering that many people are trying to repay from a fixed income.

The sources of these debts are not necessarily frivolous ­spending, but include borrowing to fund an essential purchase (29%), ­unemployment or inability to work as much as intended (18%) and family obligations (5%). 

However, others did admit that overspending on non-­essential items (13%), poor money ­management (10%) and ­finding ­retirement more expensive than they assumed (23%) had ­contributed to their current debt.

This final point is incredibly interesting from an adviser’s point of view as it highlights not only the importance of taking into ­account inflation when planning a ­retirement portfolio, but also how valuable advice is. 

With the Retail Distribution Review firmly on the horizon, these type of statistics are invaluable when looking to state the case for the importance of advice.

The UK’s over-55s each have many different financial worries. But inflation, debt and the implications of poor financial choices are areas that are causing concern for retirees. Thus, there is significant scope for providers and advisers to step up to the challenge and help people make smart financial ­decisions that will carry them through the remainder of their lives.

Clive Bolton is at-retirement director of Aviva