Britain’s household debt is now at its highest level since 2008’s financial crash, according to Bank of England data. The country borrowed £192.2 billion in November 2016 — a 10.8% increase from the same period in 2015. £66.7 billion of this was spent on credit cards.
Experts predict that this level of borrowing cannot be maintained, with a potential rise in inflation on the horizon. However, despite this, The Office for Budget Responsibility (OBR) estimates that households will spend £49.6 billion more than they earn by 2021.
With debt levels high, how is our borrowing impacting our pension plans? Research from personal pension provider, True Potential, suggests that our spending now could be severely limiting how comfortable we are in later life.
The provider’s Tackling The Savings Gap Consumer Savings and Debt Data Q3 2016 report has found that many savers expect to reach retirement age with debt. At 55, UK savers can access 25% of their pension pot tax-free. A fifth of respondents said they would use this sum to clear debt. Likewise, 42% of savers said that they would use an unexpected £1,000 windfall to pay off debts.
While financial advisors recommend clearing debt as soon as possible to avoid paying interest charges, those close to retirement age are continuing to borrow and create new debt. The study found that over 55s took out an average of £1,108 of debt in Q3 2016.
So how is our borrowing impacting our pension potential? Naturally, an increase in debt limits the amount of available cash we’re able to save towards our future. UK people currently save £325 a month on average into their pension pots and are on-course to receive £6,000 a year in retirement. Despite this, research has shown that an annual income of £23,000 is required in retirement to live comfortably, underlining a stark difference between expectation and reality.
However, attitudes to pensions have improved on the whole. The number of people who save nothing towards their pension dropped in Q3 2016, down to 35% from 39% in the previous quarter. Clearly, people are aware of the importance of saving for their future and with greater financial knowledge and awareness, there is the potential to enjoy a more comfortable retirement.