New job: pension or debt?

Lois_and_CK

I've got a new job, which offers 10% on top of my salary that I can choose for my new company to invest in a pension for me, or I can take it as extra salary.

I have debts which, with my new salary, I can pay off in 2 years (instead of my previous debt-free date of 3.5 years). I know the advice from Martin is to pay off debts before saving for retirement, but in this situation I really don't know what the best way forward is and would appreciate some opinions.

I'm 35 and have no other retirement savings (apart from £3k in an old personal pension that I haven't paid into for several years), so I'm very keen to get started on retirement savings as I'm starting late and have so little.

I don't know whether to take the 10% as extra salary so I can put it towards my debts and clear them even earlier than in 2 years. But then I'll pay tax on it and lose 20% of it. Or, if my employer pays it into a pension for me, then I don't lose that 20%, and I can get going on my retirement savings.

What would other people do in my situation?

dunstonh

I know the advice from Martin is to pay off debts before saving for retirement

That is far too simplistic and can be wrong for some people.

I'm 35 and have no other retirement savings (apart from £3k in an old personal pension that I haven't paid into for several years), so I'm very keen to get started on retirement savings as I'm starting late and have so little.

Ok, so the yardstick of having £35k in a pension by age 35 is a little off the mark for you but you are aware that you are starting late. So, thats a postive.

I don't know whether to take the 10% as extra salary so I can put it towards my debts and clear them even earlier than in 2 years. But then I'll pay tax on it and lose 20% of it. Or, if my employer pays it into a pension for me, then I don't lose that 20%, and I can get going on my retirement savings.

Its not just 20% tax you will lose but also NI.

Its unusual for an employer to add the same amount to your income that they would put in the pension. Usually where there is a choice there is a hit for not using the pension because the employer pays NI on the extra as well as you.

Questions:
1 - can you change your mind later and move into the pension if you take the money instead now?
2 - are your debts serviceable (sounds like they are)?
3 - if you paid off the debts instead, you would really need to be thinking about paying into the pension above and beyond the employers money (you may need to do that anyway to play catch up). Can you afford that?
4 - How does this income compare to your previous employment income?

The risk of not joining the pension is that you will get used to having that 10% in your pay and losing it in a couple of years will not be easy. Assuming you joined it now and your pay is higher than before, you are not even going to notice it. So doing it now is mentally the easier option.

Lois_and_CK

dunstonh wrote: »

That is far too simplistic and can be wrong for some people.

Yes, that worried me.

dunstonh wrote: »

Its not just 20% tax you will lose but also NI.

Thank you, I didn't think about NI.

dunstonh wrote: »

1 - can you change your mind later and move into the pension if you take the money instead now?

Yes I can do this.

dunstonh wrote: »

2 - are your debts serviceable (sounds like they are)?

Does serviceable mean that they're manageable? If so, yes they are now. Although a few months ago I was sinking in debts and was almost on the DMP route until I got some temping work. I'm now making minimum payments + a bit extra on top, with a debt-free date of 3.5 years time. Once I start this job I can make minimum payments + more on top than I do now. I've calculated the numbers in a snowball calculator and can now clear them in 2 years (without taking the 10% into it).

dunstonh wrote: »

3 - if you paid off the debts instead, you would really need to be thinking about paying into the pension above and beyond the employers money (you may need to do that anyway to play catch up). Can you afford that?

My rough plan, once I'm debt-free, is to have the company pension and also make my own private investments (although I'm still researching and reading pension and investments advice at the moment). I intend to plough all that money I was paying to debts into retirement saving and paying off my mortgage.

dunstonh wrote: »

4 - How does this income compare to your previous employment income?

I've got a decent pay rise with moving jobs. There's also a profit-related bonus scheme, but at the moment I don't know how much that would be. I'd pay that bonus off my debts once I'm eligible.

dunstonh wrote: »

The risk of not joining the pension is that you will get used to having that 10% in your pay and losing it in a couple of years will not be easy. Assuming you joined it now and your pay is higher than before, you are not even going to notice it. So doing it now is mentally the easier option.

Yes, very valid point.

Thank you very much for all your advice.

DD4

I don't think Martin Lewis advises paying off debts before saving for retirement. He does say that you should pay off debts before building up savings, but this is far different from pensions. What many people do is have (say) £3k in savings earning 3% interest and yet have £7k of debt costing 7% in interest. Clearly then it's financially better to pay the £3k onto the debt and just pay interest on the remaining £4k.

Pensions on the other hand are quite different and I'd be amazed if Martin was advocating non-payment in favour of debt reduction, especially if the debt is under control. I've been in and out of debt for years but always made sure that I contributed to the company pension.

We may struggle financially for all of our working lives for one reason or another (kids, redundancy, lifestyle changes, etc.) but unless we also want to struggle financially in our retirement years as well, then we have to put money away for our old age. Simple as.

Lois_and_CK

DD4 wrote: »

I don't think Martin Lewis advises paying off debts before saving for retirement. He does say that you should pay off debts before building up savings, but this is far different from pensions.

Thanks for your thoughts, DD4, much appreciated.

I got that info from Martin's Pension Money Saving article; it says under 'how much to put in a pension':

"Before starting, it's worth noting those in debt are far better off getting rid of that before pension saving."

DD4

Thanks for that. Well all I can assume is that Martin means for those who are deeply in debt and failing to make repayments. I guess if it's a choice between putting food and the table and keeping a roof over your head or paying into a pension then it's an easy choice.

Otherwise I think Martin's advice is pretty poor in this respect. Some people can be on IVAs for 5 years and could have been in debt for many years before that. Is he saying that you should lose perhaps 5 to 9 years of pension contributions while you repay debt? Crazy.

I'm no fan of any sort of 'extreme finance' approach to problems, such as spending 10 years overpaying a 25 year mortgage in order to be debt free, to the exclusion of pension & emergency savings. I think they're the financial equivalent of crash diets, and we all know how they turn out.

Lois_and_CK

Thanks DD4.

I'm in a position where I can comfortably meet minimum payments on my debts, plus some extra on top of that. I've also snowballed them; I've transferred balances to the lowest interest cards and am using my extra money to pay the highest interest card. So all in all I'm not in a 'desperate' debt situation and the balances are reducing nicely.

I really appreciate all the opinions - they're very useful.

DiggerUK

Lois and CK,

Martin's advice is not just common sense.
Regulations that are supposed to govern the conduct of IFA's are quite clear as well, they must not advise you to take on further financial commitments whilst burdened with debts.

Quote Martin.
"How much to put in a pension
Before starting, it's worth noting those in debt are far better off getting rid of that before pension saving. Plus a pension's only one form of retirement planning, combining it with other investments is the best way"

Note he says "far better off", not could be better off.

dunstonh

Martin's advice is not just common sense.
Regulations that are supposed to govern the conduct of IFA's are quite clear as well, they must not advise you to take on further financial commitments whilst burdened with debts.

Rubbish.

Note he says "far better off", not could be better off.

Well that would only apply to those that would be far better off. It would not apply to those that would be far worse off with that course of action.

DD4

It's the nature of modern life that at certain points we will nearly all find ourselves in debt. A new graduate could be in several thousands of pounds in debt with student loans and study loans. The graduate could land a new job that entails travelling where s/he buys a car on finance or obtains a season tickety loan for public transport. A new parent could run up a credit card in order to pay for essential and often one-off baby expenditure. There are countless reasons for people to obtain credit and therefore end up with debts. If people follow Martin's poor advise and pay off loans before you pay into a pension then these same people might as well write off any chance of retiring with anything other than a state pension for income.

Everyone uses credit to a greater or lesser extent, even if it's just in the form of a mortgage. If everyone followed Martin's advice to get rid of debt before paying into a pension then hardly anyone would actually have a personal pension. Sorry, but this is poor, poor advise on Martin's part.

jamesd

DiggerUK wrote: »

Martin's advice is not just common sense.

Right. It's simply wrong in this case for many people.

Here we have someone who is using the snowball method to reduce debts and a stock market that may well pay more than 30% this year. It'll be really tough for a lot of people paying off debts to save more than 30% interest. Even on average you might expect to get 7-15% a year depending on how you invest. For snowballing and using the credit card shuffle with 0% offers the pension is easily going to be the choice that leaves someone better off.

Martin's guidance is a nice generalisation but it always has to be applied with common sense and remembering the situation of the person involved. Here it seems that Lois and CK have a choice:

1. Take £100 and get it paid after tax and NI, leaving them with £69.
2. Have the employer contribute it to a pension, all £100 (and possibly more employer NI added as well).

That's 100 / 69 * 100 -100 = 45% gain just for putting the money into a pension instead of using it to pay off debt.

And here we're discussing someone who's clearing the debt in a couple of years, so that means they are better off even with no investment growth if they are paying even 22% on their debts.

Now, for someone with larger debts in relation to income and not using salary sacrifice the calculation could well be different, particularly if they were having trouble clearing the debts. Then the pension money could be the critical bit of extra income that it takes to start reducing the debts instead of having the debt continue to grow. Easy to say the pension should wait in that case.