Pension or pay debts?

lowely · 26 April 2015 at 8:11PM

Hi All,

Not wanting to be a clich! but long time lurker and rarely posting....

I was really hoping some of the experienced DFWs could help (or anyone to be honest). I am married and have x2 children and have managed to rack up £33,000 unsecured debts (£25,000 loan @ 7.2% and the rest on an interest free balance transfer credit card). The total monthly repayments come to a horrific £733 which is scary. However, my pension contribution is currently £510/month. I was wondering if the sensible thing to do would be to take a pension contribution "holiday" until the loan and credit card are repayed? I am a teacher and the pension is pretty good and the contributions from the School are very good. I'm nervous about doing this but, honestly, I'm not too sure how to pay this amount off without doing it. Any help or suggestions would be hugely appreciated. Ideally, I would like to pay this all off and start saving for a deposit for a house within 5 year (I am currently 35).

Thanks!

L

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Tixy · 26 April 2015 at 8:25PM

Hi

I would be very reluctant to cancel your pension contributions in your position. Even more so if your work would stop contributing if you also do.

But I can see that is a lot of debt. As a starting point have you worked out how much you can afford towards your debts a month (if you carry on with the pension)? And if so have you worked out how long it will take you to pay your current debts off?

lowely · 26 April 2015 at 8:35PM

Thanks for the quick reply.

To be honest, the £238ish on the Credit Card is no problem and will be cleared in 3 years. The issue is the loan at £496. It is so big and if I make these payments it will take 5 years to clear. It is such a large amount of my outgoings. I really don't want to cancel the pension (as you say, the employer contributions are exceptional). However, as a 3 year pension holiday, I could then go back in on the same rate and would then be OK to cover the loan.

L.

killerpeaty · 26 April 2015 at 8:37PM

Is the £510 the amount before or after the tax relief? I assume that it is after, so you really wouldn't get that amount of money. You will be paying more tax.

You have to remember that compounding will greatly improve your life after work. It is always worth having a pension building.

It's a tough decision, I'm strongly for a pension but I'm not in your position.

lowely · 26 April 2015 at 8:41PM

Thanks for the views.

I guess this is perfect example of "advice is what we ask for when we already know the answer but don't want to hear it". I agree with you. The £510 pension contributions are probably more like £300 after tax. The tough part is that I just don't know how to pay it off! Ahhhhhhhhhh!

L.

Liliyanna · 26 April 2015 at 8:50PM

Hi Lowely,

I have been in your position so can understand where your heads at at the mo, however have you given the moneysaving your best shot or are you overwhelmed with the size of your debt?

If it's the first I can see why you would consider a payment holiday but if it's the latter then please give these boards a chance.

Have you posted an SOA and allowed us to offer you advice? Have you read through the budgeting and food planning boards to see if you can save money that way?

There are so many useful boards on here please be certain you have exhausted every avenue before you decided to suspend your pension as you will never be able to regain the compounded savings in future without some serious effort!!

At the highest point I had £42,000 to clear and felt truly overwhelmed but these boards and determination got me through and debt free last year.

Give us a chance and this could be you too!!

All the best

Lily x x

lowely · 26 April 2015 at 8:55PM

Thanks Lily!

It really does help to hear that other people have been in the same situation and come out of it. I've done my SoA several times and even really cutting things down I just can't see how to make it work. I don't want to lose the pension. I guess I will go back over it again and see what I can shave off!

L.

Muhren · 26 April 2015 at 9:05PM

I'm not sure how your pension works but could you drop your monthly contributions down to the level where you still maximise what your employer puts in?

This could give you a little extra each month to attack your debt whilst still paying into your pension.

lowely · 26 April 2015 at 9:20PM

Unfortunately, I can't reduce my contributions. I can keep what I have paid in the system and I am allowed to take a "break" of a maximum of 5 years. This would mean that I wouldn't be contributing during that time (or receiving employer's contributions) which is not great but at least what I had already contributed would still be in the system. Not fun....

L

bennyhill_2 · 26 April 2015 at 9:48PM

Could you ask for a pension review of say the last 5 years, so that you could review not only what went in over that period but also what it grew to (ie: what's it worth now minus what you had at the start, and what you've paid in over the period you are reviewing).

If in real terms the pension hasn't grown at an equal or higher rate than the percentage of the loan you have, then it makes sense to stop the pension and attack the loan - overpaying it now would mean it would be cleared faster, and you'd pay less in interest charges. Don't forget you get tax relief on the pension now, but will pay tax at the prevailing rate at the time you come to draw it (this could be a higher rate than what the tax relief was, or it could be lower).

Of course the pension history is just that, and the next 5 years the pension could grow massively, but in your circumstances I'd say concentrating on the hear and now is more important than drawing the pension is xx years time.

All IMHO opinion of course.

lowely · 26 April 2015 at 10:10PM

Thanks Benny. It's really useful to hear all thoughts on this. I've asked for a statement and will see what it says. It really does feel like a tough decision but I guess that's what happens when you get yourself into these situations. Still, I've got to try and be positive and try to see light at the end of the tunnel. Thanks again.

L.

Pension or pay debts?

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