Should I stay or should I go?

mstopham

I have a company pension, the basics are I contribute 5%, they put in 10%
The projected annual rate on retirement is circa £6400. (This will rise in line with inflation upto 5%)
I also get 4X my salary life assurance included.

I also have debts as per my sig.

My thoughts are to come out of the pension scheme at the moment, pay my debts off faster and this will enable me to be in a position to buy a property quicker (hopefully before the next big house price boom!) and then get back into the pension.

If I come out of it for 3 and a half years then go back in the projected rate on retirement will be £5340 per annum.

I would be able to strip an extra £70 a month off my debts but what advice can anyone give me to help me make this decision?

dunstonh

My thoughts are to come out of the pension scheme at the moment, pay my debts off faster and this will enable me to be in a position to buy a property quicker (hopefully before the next big house price boom!) and then get back into the pension.

You are aware that you wont actually see your pay get that 5% increase? Pension contributions come off before tax and you could be saving on NI too. So, the net increase is likely to be closer to £50.

So, are you willing to give up £210 per month to save £50?

mstopham

I am aware it will be after tax etc but the amount is actually £69 and some pence, I pay in £100 and less tax and NI it should be around £69/£70

But no the point is I am giving up £230 to reduce debts by £70. This would get me debt free a few months earlier which in turn could mean I get on the property ladder earlier with my OH and that has social benefits as well as possible financial ones. For one I am throwing away £265 a month on rent at the minute, each month earlier I get on the property ladder I am that much better off.

Also it is a smart pension scheme which means my salary is actually reduced by 5% which means I don't get as big a pay rise and I can't borrow as much when lending is calculated on income.

I don't think I have missed anything in my orginal post in terms of the figures but thanks for pointing that one out because I didn't make it clear I had taken the tax into account already.

dunstonh

But no the point is I am giving up £230 to reduce debts by £70.

Based on your revised figures, you are giving up £300 to get £70.

This would get me debt free a few months earlier

And you will spend your whole retirement paying for it.

which in turn could mean I get on the property ladder earlier

Why the hurry? House prices are only going in one direction and will be for a while. Get out of debt, start saving and wait until the market bottoms out.

For one I am throwing away £265 a month on rent at the minute, each month earlier I get on the property ladder I am that much better off.

£265 rent is not a lot. A £100k mortgage is going to be around £700. What sort of size mortgage are you looking at? If you cant afford £70 before you buy the house, what makes you think you will be able to afford it afterwards?

mstopham

dunstonh wrote: »

Based on your revised figures, you are giving up £300 to get £70.

Fair enough.

Why the hurry? House prices are only going in one direction and will be for a while. Get out of debt, start saving and wait until the market bottoms out.

As I said social benefits and possible financial ones. The hurry is to get out of debt. And as mentioned below not be wasting money on rent.

£265 rent is not a lot. A £100k mortgage is going to be around £700. What sort of size mortgage are you looking at? If you cant afford £70 before you buy the house, what makes you think you will be able to afford it afterwards?

I am paying around £700 a month on clearing debt at the minute. Affordability is a relative thing though in this case. I am trying to weigh up which is the better option overall.
I will probably be looking at a mortgage of around £120,000 but a joint one (my OH earns circa £40K no debt and currently around £10K in savings and has her own home but for obvious reasons wants me to get out of debt before she enters into a long term financial commitment. She has agreed to stump up most of the deposit though when we get to that point.). So I don't envisage £5-600 a month as being a problem of my share of the mortgage once my debts are cleared.

EdInvestor

Have you discussed the pension issue with your OH? Given what you'd lose by dropping out and the comparatively small amount you'd gain, looks like a false economy to me.

mstopham

EdInvestor wrote: »

Have you discussed the pension issue with your OH? Given what you'd lose by dropping out and the comparatively small amount you'd gain, looks like a false economy to me.

Yes, she is happy for me to do what I think is best so long as I give both options due consideration.

I am not the greatest on understanding questions so if I check out of this world prior to retirement, what happens? My OH would get the life assurance cash, do you think she would get the pension as well? If we were to have split, she has passed on first or we happen to go together what happens to it then?

I am trying to get a picture here of the long term benefits, I understand that if we both live to a ripe old age happily ever after then the more in pensions or other retirement investments the better but what happens to my hard earned £ if we don't?

EdInvestor

mstopham wrote: »

Yes, she is happy for me to do what I think is best so long as I give both options due consideration.I am not the greatest on understanding questions so if I check out of this world prior to retirement, what happens? My OH would get the life assurance cash, do you think she would get the pension as well?

You need to check the scheme benefits. With personal pensions, the whole fund is normally paid out tax free to nominated beneficiaries (not part of the estate so no IHT payable) on death before taking the pension. But company schemes may have other rules, eg paying an income to dependants, so check. You should also check what happens to these benefits, if you leave the scheme (even temporarily).

Then i would suggest you both review the options. Your OH is sensible in encouraging you to brief yourself fully on these financial matters.

Both you and she would also be wise to look at state pension entitlement, forecats avialble here:

https://www.thepensionservice.gov.uk

I believe that "salary sacrifice" pensions affect your entitlement to the State Second Pension, which could be a factor worth considering. S2P can more than double the size of the basic pension.

What kind of pension is your company pension BTW? We've assumed it's final salary is that correct?

mstopham

Total contribution 15%
Age at joining

25 £9,825 pa

35 £6,675 pa

45 £4,075 pa

55 £1,875 pa
Sample pensions shown are in today’s money, payable from age 65, based on a male member joining the Plan from the age shown. The calculations assume a pensionable salary
of £30,000 pa at joining, increasing in line with inflation to retirement. The pensions shown above include a 50% contingent spouse’s pension and receive inflation-linked
increases in payment (capped at 5% pa). An investment return assumption of 5% pa (less 0.5% pa in respect of management charges) has been used. Please note that the
pension projections shown above are for illustration purposes only and are not guaranteed amounts.

That is the stuff off the brochure.

You buy a pension at the end with your pension fund.

Day_Trader

Just an extension to what Dunstonh and EdInvestor have said really but you need to review the scheme. Equally with property falling in price you aren't 'throwing' money away - in fact you're well hedged against price falls. Buying a house should also never be for financial reasons - real returns on property are 0 (long term). In the current clime you are likely to face negative equity if you don't do your homework.
So you have a money purchase scheme which means at retirement you have to purchase an annuity with the fund (primarily - although you can transfer). Annuity rates will differ and your salary may well rise over the years so the figures you quote are an assumption but probably not a bad basis to work on.
I think you need to order your priorities as it seems you want to do several things at once. The steps you should take really are
Pay off debt
Save for a deposit
Maintain pension contributions throughout as they are generous employer contributions.
Also depending on what age you retire the difference in overall pension could be big. You said projected was £6400 but if you withdraw then you only get £5400. I appreciate these are assumptions but lets say you retire at 55 and live till 80 that's £25,000 you are giving up. Your debts are less than that so it should be a no brainer.

I see you're paying the debt off at £700p/m - have you looked elsewhere on this site to make sure the APR's are the lowest they can be?

EdInvestor

Day_Trader wrote: »

I think you need to order your priorities as it seems you want to do several things at once. The steps you should take really are
Pay off debt
Save for a deposit
Maintain pension contributions throughout as they are generous employer contributions.

Yes.The OP is clearly keen to move in with his girlfriend hence the effort to meet her stipulations. However the pension is a good one with a big employer contribution and the OP shouldn't drop this for the very small extra effect it will have on his debt repayment schedule.

I wonder if the OP could structure a deal with the G/F whereby she funds the new property initially, with him paying her rent until the debt is sorted. His rent could then notionally accumulate until he had a "stake" in the property - and perhaps some savings as well - at which poiunt they could switch over to a joint ownership arrangment?

It's a terrible time to buy (and particularly sell) property at present though, so I'd say there was no rush - think next Spring at the absolute earliest : the market might however still be pretty moribund through 2010.It depends on how soon the banks can start lending again.