Pay Pension contributions or pay off debt?

Barebear

Hi all,

I am after a bit of general advice on my pension situation, but also some debt advice too. Both are linked hence the reason it's posted here.

I am 33 and as yet have no pension plan whatsoever - I started a company pension years ago, but withdrew all the funds shortly before it was to be tied up. So now I have no pension at all.

My company has just restructured and is now offering 10% company contributions but not Final Salary.

My debt situation is as follows:
£19,000 unsecured debt (various rates with £2000 at very high interest) and £60,000 mortgage with no repayment vehicle and 3 years into the Interest Only mortgage.

I can comfortably meet all my repayments right now, but I would be stretched if I contributed 5% to the pension. I recently sorted my finances and have got all my debt and utilities very well sorted.

I am feeling anxious about becoming financially secure sooner rather than later and I'd like to start planning for retirement now.

How should I balance the Pension Vs Debt situation?

Any help is much appreciated.

**edit**
Should say my salary is around £31000 - see SOA below.

dunstonh

You dont mention your income which is of course important to know as it would indicate if the level of debt you have is high or low.

What does concern me is that the level of debt isnt very high and the mortgage is quite small. Yet you are on interest only and cant afford to pay into the pension with just a very small contribution level. So, where is all your spending going?

Let us know you income.

margaretclare

Everyone should be paying off debt. Everyone!!!!

Barebear

Thanks - here is next month's budget as it stands now and this is average for a month. "Balance" at the bottom means disposable income (my other half pays food and other bills, but this is what I'm due each month.

Income Amount(£)
Salary £31,000
Monthly income after tax 1978.00
Other income
Starting Balance
Total monthly income £1,978.00

Expenses Amount(£)
Mortgage 399.00
Entertainment 0.00
Council tax 157.00
Petrol/diesel 120.00
Electricity 90.00
Mobile phone 90.00
Satellite/Cable TV 46.00
Gas 40.00
Gym 33.90
Internet services 29.99
Car maintenenance (including MOT) 0.00
Telephone (land line) 20.00
Car Insurance 21.54
Contents Insurance 15.92
TV Licence 14.00
Road tax 0.00
Pet Insurance/Vet bills 14.17
Life Assurance 7.17
Buildings Insurance 7.09
Haircuts 6.00
Other Insurance 0.00
Charges 0.00
Clothing 0.00
Holiday 0.00
Other Spending 0.00
Presents (birthday, christmas etc.) 0.00 0.00
Total monthly expenses £1,111.78

Unsecured Debt Description Debt(£) Monthly(£) Actual(£) APR(%)
Welcome 2748.00 83.30 66.83
Vanquis CC 248.15 11.00 53.99
Monument CC 228.88 10.00 31.39
Capital One CC 285.69 14.00 30.34
Halifax Loan 7086.00 152.00 15.00
CoOp Bank Loan 4613.00 171.61 12.00
OUSBA 292.00 70.00 8.80
Student Loan 2500.00 0.00 4.80
OD 1180.00 0.00 0.00
Unsecured Debt totals £19,181.72 £511.91 £0.00 -

Monthly Budget Summary Amount(£)
Total monthly income 1978.00
Monthly expenses (incl. secured loans) 1111.78
Available for debt repayments 866.22
UNsecured debt repayments 511.91
Balance £354.31

Hope this is understandable as it's copied from various parts of my spreadsheet.

**edit** Let me know if you'd like me to attach a file of some sort - no personal details obviously.

dunstonh

I dont have a chance to say much more at the moment as I am busy. However, an immediate thing that sticks out like a sort thumb is that the net pension contribution is likely to be less than your mobile phone bill.

Mobile phone £90 pm
pension contribution 5% (which means 4%), is going to be around £90.

In return for that £90pm mobile bill you get nothing. In return for that £90 pension contribution you get around £200 put in your pension by the employer on top of your £90.

Whats more important to you. £90 of phone bill or £200 for free money which could really set your retirement up nicely?

Is there any equity in the property to perhaps move some of the debts onto to get a cheaper rate and lower payments?

Barebear

I know what you mean. The mobile bill is the one I'm struggling to cut down. However, this value for next month includes around £30 or £40 for the replacement of a lost phone. It would normally be £50 or £60.

I would like to move the debt but I have had a bad past with money and can't get any low cost debt via the mortgage despite having a good £40k in equity.

I suppose in the long run, when you put it in cold hard cash amounts, paying £100 to the pension instead of the debt is worth more to me. But it feels like the debt is a burden.

Would I benefit from splitting the £100, by paying £50 per month to debt and about 3% to the pension? Would that still mean I was getting 10% of my salary paid in by my company despite me not paying 5%?

dunstonh

Would I benefit from splitting the £100, by paying £50 per month to debt and about 3% to the pension? Would that still mean I was getting 10% of my salary paid in by my company despite me not paying 5%?

You will need to check the scheme terms. Ideally, at present you want the highest employer contribution at the lowest cost to you. Remember that the actual figure you pay is the net figure, not the gross. So, when you see 5%, that actually means 4% (due to 20% tax relief). If you can pay 3% and get 10% then that is great.

Dithering_Dad

Good advice from dunstonh regarding your pension. You won't get a much better incentive to start up a pension than having 10% free money from your employeer and a 20% tax rebate from the government. That's a lot out for not much in.

As far as your other outgoings are concerned I should (if you haven't already) post your SOA in the Debt Free Wannabe (DFW) board and they will help you get down your outgoings. I know for a fact you need to lose the sky tv and get better deals on your mobile phone and internet services.

You'll hopefully be able to free up enough money each month to not only make a dent in those debts but to also allow you to contribute to a pension plan too.

jamesd

I suggest deferring most pension contributions until you've paid off all debt at rates above 15%:

Welcome 2748.00 83.30 66.83
Vanquis CC 248.15 11.00 53.99
Monument CC 228.88 10.00 31.39
Capital One CC 285.69 14.00 30.34

I'm assuming that you cannot get another loan from normal sources, so I suggest that you go and visit Zopa Listings and seek a loan to borrow ONLY enough to pay off those four debts. You will probably end up with an interest rate of between 16% and 19% and the loan is fully flexible, so if it is still your highest rate debt you can repay it as fast as you are able. You might end up with a rate below 15% but that's not very likely.

Be sure to give the list of those existing debts and their interest rates as why you want the loan. In a different place, also list the other debts and their rates and say that you don't think that it is worth borrowing money from listings for those because you'll probably get a higher rate. It's vital that you declare all of the debts if you're to get the best rate possible - any doubt at all that you're making a full disclosure will cause some people not to trust you and you need the greatest amount of competition to get the rate as low as possible.

Choose to have the listing end on a Wednesday or Thursday evening between 9:30PM and 11PM. Those are the days and times with most money available, again a way to increase the competition to lend you money.

The Listings at Zopa do not have an affordability check, so if you pass the initial screening to be allowed to list, you should be able to get the loan.

You should do what it takes to get the employer's pension contribution, even if that is 5% needed from you. That will pay you more than the interest rate on the debts, so you should be better off doing this bit of pension investing. It's not currently a good idea for you to do more than it takes to get what the employer will match.

Barebear

Thanks folks - except Tibets :mad:

I found out that they want me to contribute a minimum of 5% before I'll get the company contribution of 10%. But I can pay in more if I wish. So I'll be paying in the 5% and hitting the high cost debt hard in order to get rid.

I tried Zopa, but it looks like they won't offer me anything due to the length of service in my new job, 8 months so far, despite me being in my old one for over 11 years! I got an OU degree and subsequently a far better job. Penalised for getting on in life, eh? Incidentally, I got 3 stars on my credit worthiness which is far better than I expected.

It's all very much more clear now than it was before.

Thanks again.