Rising debt levels for OAP's

Living on a fixed income is a challenge at the best of times, but when you have limited opportunity to improve on your income then it becomes especially so particularly when trying to live on a pension.

The cost of living tends to be measured by two indicators - the Consumer Prices Index and the Retail Prices Index. These both seek to make an estimate of how much the cost of living is increasing over time and are used in various ways to increase the amount of state and other pensions that may be payable.

The problem with both these measures is that they are generic and do not reflect the actual inflation being experienced by any one individual. For example, both include items of furniture and electronics in their basket of goods, but how much new furniture or consumer white goods does an average pensioner buy? Not much. Therefore, these measures, whilst good as a general guide, do not reflect the real cost burden on pensioners today which tends to reflect more basic commodities such as fuel and food - the cost increases of which have far exceeded the CPI or RPI.

For the vast majority of people their house is their single biggest investment and represents their largest capital sum saved for retirement. With house prices currently falling at 15% to 30%, dependent upon area, much of what was expected to be free capital to fund retirement is now not realisable. Many pensioners have not been able to pay off their mortgage by the time they retire and are taking this burden into a period where their income is greatly reduced. Additionally, many are also entering retirement with credit card debt that may have built up over many years.

It is difficult to live on the state pension alone and with any additional income from work pension schemes also being counted as income for tax purposes it is easy to see much of the income benefit being reduced once the personal earnings threshold is reached.

Additional state benefits can be available to the elderly although these tend to be means tested, which entails lots of form filling and disclosure of personal information. As a result, many pensioners are either frightened or too proud to apply for what they could be entitled purely by the process.

The final burden is that the interest earned on any savings has been reduced considerably as the interest rates have dropped to try and stimulate the economy. Whilst the focus is to try and get banks lending again to industry and for home purchases, the cash saver has paid the price through less attractive deposit rates.

All of this leads to less cash in the hands of our pensioner community. Many schemes have evolved over the years to capitalise on the previous property boom but now these equity release schemes are drying up as prices fall.

With the market seemingly permanently changed, the need to plan for retirement is greater than ever. Clearing debt, including mortgage or credit card, is now a critical element to avoid continued and potentially unmanageable debt in later life.