Pension/Savings or Debt?!!

Ayeshalush

Hi everyone

This is my first post.

I have been reading this forum avidly for the last week and have been very humbled and inspired by all the stories I have read.

Other than my mortgage, my only other debt is a Northern Rock Loan for £9500 which I took over 5 years, last June, at 5.9%. Up until this week I have not been too concerned about this loan as I considered it manageable (and I did take out insurance on it - seprately not with NR), however if I was to lose my job, be made redundant (may not be outwith the realms of possibility :eek: )etc, even with the insurance, my finances may be a bit of a struggle. Reading this forum has inspired me to overpay my loan as much as poss each month to try and pay it off early. I have made all major changes i.e Utilities suppliers, SKY - only pay £15/month but about to cancel but going to start working on the smaller day to day saving to contribute to the loan overpayments.

At the moment I don't contribute to a pension. I contributed to an occupational pension for just over 2 years (about 8 years ago) and this is now frozen. I also contracted out of SERPS and had these paid into a private pension for a year or two prior to this. This pension is also frozen. I started paying £80 a month into a cash ISA in Jan'05 instead of a pension. In Feb'06 I increased this monthly deposit to £100.

My question is .......(finally! ) Should I be paying this to my loan to clear it earlier or am I best to continue to add to my 'pension fund' as I know I am not preparing well for my old age!! (I am 36 at the moment).

Any advice would be gratefully received.

Thanks

Ali
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Thenotsowyzewun

I think paying off debts makes more sense before working on savings. BTW the difference between a pension and an ISA is that pensions (stakeholder anyway) you get tax added when you put it in (as in put in 78p and Gordon adds 22p) whereas ISA you put in money and when you take it out you don't pay tax on it (you pay Income Tax on drawings from a Pension but not from an ISA).
I'm not sure, but I reckon Stakeholder makes more sense - you end up paying tax on the sum either way, and if you can pay more in to start out with, you can earn compounding interest on that sum before you pay tax on it again ).

Maybe there's a more mathematical way of giving you an answer though... I'm just going on gut instincts.

Ayeshalush

Thanks for your reply. That's what I was thinking, but I'm just not sure how comfortable I am with not making any provision for my old-age over the next 2-4 years!!

As far as pensions/ISAs go, I decided after all the pensions debacle (and people ending up with very little left in their pension funds) that an ISA was less risky - at least I would be guaranteed to keep my capital. (I'm an Assistant Accountant - not comfortable with risks!!! ).

CLAPTON

is the loan a fully flexible loan so you can overpay without penalty of any sort...if so pay the maximum off that you can (loan interest rate 5.9% plus cost of insurance ...unstated, best saving rate 5% ...no brainer)
pension...do you have an opportunity to pay into a company scheme which is enhanced by the company???? or is it our own scheme???

Ali-OK

I'm in a smilar boat to yourself age wise and not much in the pension pot (though much bigger debt!) and I'm putting a bit in pension (£43 a month), and much more to the debt, but also a little to ISA for emergencies and also because of the pension debacle. I thought a bit of each is safer, though it's weighted highly in favour of getting rid of the debt.

Does the loan allow overpayments, or do you need to save to pay off as an early settlement?

Ayeshalush

Yes Loan is fully flexible, no penalties for additional payments. Can't remember ISA rate exactly but 5.something% - so I was thinking not much difference but after reading this forum I really, really want to be debt free (and eventually mortgage free) so I know that you're right.


My employer doesn't provide a company pension scheme. I pay into an ISA rather than a pension for reasons explained above. I could (once loan is repaid) 'unfreeze'(don't know correct term) pension plan which SERPS were paid into which would avoid set up costs of a new pension plan.

But I know you're right it is a no-brainer - I just needed to hear it from someone else.

Thank you.

Ali

Ayeshalush

I only found out yesterday that I could make overpayments on my loan. After reading this forum, I was all set to move my loan to Egg, which has a slightly higher interest rate but allowed overpayments. However, when I phoned Northern Rock for a settlement figure I thought I would check first and was very surprised when they said overpayments could be made at any time, without penalty. (Notice they don't advertise this though!!)

Ali-OK

That's interesting..a friend has a Northern Rock loan and since I can't stop raving about this site and saving, she has started to get the bug too!

We read her Ts&Cs and no sign of penalty free overpaying - I'm going to tell her about this and hopefully a phone call to them will enable her to overpay too!

Ayeshalush

She shouldn't need to phone - I didn't need to ask for it to be done, I got the impression everyone can do it, and looking at the FAQ on their loan application it applies to all new loans. Have posted link below for you to pass on to her. I was told to either post a cheque or that I could make a payment over the phone.

Northern Rock FAQ