Pay as you retire? More money misery for pensioners

Even after retirement, the taxman is still after your money...

We’ve talked before about how those most in debt are those nearing retirement age. It seems a well earned retirement is becoming a thing of the past as the generation set to hang up their work clothes are more in debt than any other.

The average unsecured debt of pensioners who retired last year (from actual clients we have counselled) is £21,370; many of these clients often have no savings. The average surplus income of this age group after essential costs had been covered – the likes of mortgage, food and priority bills – was just £85.

This week the Government is set to force more misery on this group as it announces an estimated 160,000 first-time pensioners paid too little tax last year in the final year of their employment.

Underpayment notices were sent out in early September, including to those pensioners who claimed the State Pension for the first time during 2010/11. The notices will ask for repayments of up to and more than £1,000. This is all due to errors in the ‘pay as you earn’ (PAYE) system.

160,000 pensioners will be affected

When taxpayers start to draw the basic State Pension, their personal allowances can sometimes be applied twice because of the change to the source of their income during the tax year. This results in underpayments that are only uncovered by HMRC during its annual end-of-year reconciliation process.

HMRC is currently in the process of sending out the P800 notices and expects to be repaid in instalments from April 2012.

Our figures show that many pensioners are already struggling with a mountain of unsecured debt and the added burden of a repayment notice from HMRC could be the tipping point for many of them.

How are they going to deal with this extra burden?

Importantly contact HMRC straightaway to check that their figures are correct, and what the next steps will be.

The longer term problem is how to raise the money to pay this off.

One solution for those who have repaid their mortgage can be to take advanatge of the rising house prices of the 90s and 00s by using equity release.

Equity release is designed to allow retired homeowners access to their equity without having to sell up and move. There are three types of plans for consideration; interest-only lifetime mortgages, lifetime “roll up” mortgages and home reversion plans.

Equity release is often an emotive and controversial subject. Having worked all their lives to clear their mortgages, it’s understandable why some people would find it difficult to accept having to place another loan on, or perhaps even having to sell a share of the family home or be seen to be undermining the children’s inheritance.

Unregulated and unfair release plans in the 1980s also attracted a lot of negative publicity and as a result most people are extremely cautious when exploring these types of solutions. But regardless of what our individual thoughts might be, demand for this solution to debt problems in later life is increasing rapidly.

Debt help is available

Even if equity release does sound drastic to some, for more and more pensioners it’s becoming the only viable route out of problem debt, especially when they’re already in debt and the taxman comes calling. Sadly we expect an increased call for this service over the coming decade.

For those without a property or assets who are struggling with problem debt, it’s wise not to panic if you receive one of these HMRC tax repayment demands. We’re here to help you work out the best options open to you dependent on your own circumstances.

If you’re approaching retirement and you’re worried how you are going to pay off your debts use our online counselling service or contact us to give you an instant solution to almost every type of debt issue. It’s far better to act now than PAYE later.