Dropping out of pension temporarily to put money towards debts?

Ma54321

Hello. Sorry for the rubbish username I am awful of trying to pick something good for new forums!


Basically I was thinking about the possibility of my husband and myself dropping out of our company pension schemes for a while to put the money towards debt repayments instead.



I have reduced all our outgoing as much as humanly possible (mortgage/direct debits/debt repayments and food now – no luxuries! This is three years of punishment for 10 years of stupidity!) and if we keep going as we are, we have around £200 a month additional to put towards repayments. According to the snowballing site this would get us clear by October 2015. However if we were to drop out of the pension scheme we would have an extra £200 a month to spend on repayments which snowballs us to debt free in September 2014. So basically we can save a year of stress and £1958 in interest by dropping out of the pensions for two and a half years.


I have checked on the pension websites and there seems to be no issues in dropping out and then rejoining at a later date. I am just wondering if this is a sensible move or not! I am just thinking of all the extra interest we will be paying over the extra year and thinking that during the year we would have been paying debts even after we restart paying the pension we would have £6500 in the bank as we will keep up the repayments as we had been – especially as this time the payments will go to us not a bank!

Good idea/Bad idea??

mrsb83_2

How old are you? What are your and you company's % contributions?

Ma54321

We are both 28 so plenty of years left to save! It is 5.9% for me and 6.5% for him. We have both been paying in since we were 21.

RenovationMan

I'd have to say that you'd be bonkers to both stop contributiong to your pension. All you will be doing is moving financial problems from now, when you're young and can do something about it, to a time when you are old and are stuck in poverty for the remainder of your life. The actual amount you save from not contributing to a pension isn't that much once taxation has taken a bit anyway.

The better plan would be to look at where you can make cutbacks in your current lifestyle. Post an SOA and let people help you find areas where you can trim some fat off. Perhaps look at getting more hours where you work or getting an evening or weekend job.

Being in debt is a temporary problem (though it often doesn't feel like it at the time), stopping your pension payments will permanently reduce your retirement income. Think long and hard before you do it, and only do it if the bailiffs are at the door and the kids need food.

Oompa_Loompa_2

Do it! I spoke to a Financial Advisor at my work and he suggested it would be more beneficial to do that and pay off debt now - you can always INCREASE your pension contributions should you choose to, once your debt is clear.

RenovationMan

Oompa_Loompa wrote: »

Do it! I spoke to a Financial Advisor at my work and he suggested it would be more beneficial to do that and pay off debt now - you can always INCREASE your pension contributions should you choose to, once your debt is clear.

You can't increase your company contributions though, and so they're lost forever. Usually a company contributes more the a pension than the employee (or they match contributions), so by exiting a company pension you stand to lose more money from the loss of company contributions and tax rebate than you save from not contributing. All financial advisors agree that the earlier you start a pension and the more you put in it in the early years, the more affordable it is to fund and the faster it will grow. Perhaps your company just wanted to save money on their contributions and so their Financial Advisor encouraged you to exit the company pension?

Two an half years lost from pension contributions to reduce debt repayment by one year seem a bad deal, especially given that we have on average only 40 years of working life to pay for approximately 30 years of retirement. Given that other unavoidable events can get in the way of pension savings, such as child birth, long-term sickness, job loss and reduced hours, you have to make the best of the years that you are in work because no one has a crystal ball to be able to see what's going to happen in the future.

To the OP, I'd advise you to also ask this question on the pensions board to get a balanced response before making any decision.