Britain’s over 50s are splashing the extra income they receive once they’ve paid off their mortgages on holidays, home improvements and gifts for their children, according Saga Investment Services.
The research found that over 50s who own their home outright reported an average monthly income increase of £322.
When asked how they spent this money once their mortgage had been repaid, half put some of the money into a savings account, while 45% paid out for home improvements. Some 40% spent the money on holidays, while 27% bought a new car.
The average retirement age for those surveyed was 62, and this group paid off their mortgage at an average age of 55 – a seven-year period of mortgage-free income.
Less than one in four (23%) put the money into their pension. Of those that did do it, an average of 40% of their additional income was put into their pension.
Pension contributions attract generous tax relief from the government, meaning their savings get supercharged as they head towards retirement. Up to 25% of the fund can usually be taken as a tax free amount and any additional withdrawals from the pension are taxed at the savers marginal Income Tax rate. Alternatively, the money can be invested in an ISA, which grows free of Income, Dividend and Capital Gains Tax and can be withdrawn tax-free. However, contributions to an ISA do not enjoy tax relief.
Calculations carried out by Saga Investment Services show that if homeowners had diverted 100% of their monthly mortgage repayments into a pension until their retirement age, attracting basic-rate tax relief, a homeowner could have saved an additional £40,000 towards their retirement.
Nici Audhlam-Gardiner, managing director at Saga Investment Services, said: “Repaying a mortgage is one of life’s biggest financial achievements, and it’s understandable that people want to enjoy the income boost that they’re finally getting after decades of debt repayments.
“But this often comes when there’s limited time to build up as big a nest-egg as possible for retirement. In our survey, a third of people said they were able to retire earlier than planned because they’d made the effort to put their extra income into their pension, while 44% said they have ended up with a higher retirement income than they originally expected.
“Making the most of your finances in the run up to retirement is vital to ensure you have a comfortable life once work is over. Professional financial advice for people at this age can help formulate a plan to get the income they need. That’s why it’s good to see the government backing greater access to advice by giving people early access to their pension to pay for the help they need.”
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