It generally makes sense to try and pay off debts as you near retirement. In fact, it’s usually a sensible idea to pay off debt at any stage in your life.
The logic behind this is simple. Usually, the interest you pay on your debt is likely to be higher than you could achieve by investing your money…unless you’re prepared to invest in riskier investments that may fall in value as well as rise.
There are a couple of possible exceptions to this general rule:
- If repaying debt early means you might have to pay penalties. In some cases, early repayment can trigger an additional payment that may make it worthwhile maintaining the debt (at least until any penalties no longer apply).
- If you’re locked into a great fixed rate deal and your money could earn more if you invested it. Again, this assumes you don’t have to take risks with the money you invest. This isn’t something that will happen often, but it is possible from time to time.
One more point worth bearing in mind: If you can’t pay off all your debts by the time you retire, pay off the debts which are costing you most. Not in terms of your monthly repayments you make, but the interest rate you pay.
Finally, don’t forget that you can take a tax free lump sum from any pension savings you have and you could use this to get rid of any remaining debt before you retire (though remember taking the tax free lump sum is likely to reduce your overall pension benefits when you do retire).
Note: This content is general high level information only and should not be interpreted as individual advice. Because the circumstances of each reader will be different and not known to us we recommend that tailored advice from an expert is sought.