Start Paying Pension Again or Pay Off Debt

[Deleted User]

I haven't posted for a while, as I was busy working and sorting things out. Anyway, we have moved forward with our situation and got my pension sorted and paid off a bank loan. We've also got a lot of work done in the house and come off our fixed rate mortgage. Now on a rate of 2.09% above the base rate for the duration of the term. So I feel we've made progress.

My next dilemma is my partner's pension. He was made redundant 2 years ago and had to stop paying in £164 per month. He managed to get another job a few months later but the pay was much less and due to our high mortgage and debt we just couldn't afford to keep paying it. Our financial advisor also agreed that we had no choice but to stop paying in.

So now we are in the position that we can start paying in again and would like to start with £200 per month. However, we still have an unsecured debt of £22k at 2.59%. We just can't decide what is best to do! Put everything extra we have into paying off the loan (I reckon we could pay £500 extra a month) or pay £200 to the pension and £300 to the loan??????

I am going to phone the financial advisor and see if we can get an appointment but thought I'd post here too.

Thanks for any thoughts in advance.

atush

I'd say 200 to the pension, and 300 to the loan.

My reasoning is, that the pension will 'earn' more than 2.59% in that it will get an immediate uplift to 250 with BRTax relief, plus any employers contribution.

And you can reasonably expect (depending on what he chooses to invest in, in t he pension) better than 2.59% performance.

dunstonh

However, we still have an unsecured debt of £22k at 2.59%.

cheap debt. If it was 12.59% then that is different. Whilst short term expensive debt should be cleared as soon as possible, cheap debt is not a problem. Investments could perform by more than that quite easily over a 12 month period. Plus, anything you dont pay into your retirement planning now will have to be made up for later.

bigadaj

OP just remember that pensions can be volatile, so particularly with many markets at highs then it could be the case that your pension might be worth less than contributions in the Initital stages. Certainly not a reason not to invest in pensions, but it can panic people until, in all likelihood, the passion starts to outperform your debt, inflation etc.

[Deleted User]

Plus, anything you dont pay into your retirement planning now will have to be made up for later.

This is what is panicking me the most, my partner is 51 and time is running out to pay in. The 2 years 'not paying in' has gone really quickly and it would be so easy for another 2/3 years to go by. I'm desperate to get the debt cleared, but as it's such a cheap deal, I guess it makes more sense to start the pension again.

Thanks to everyone who replied you've all pointed out it's 'a no brainer'!

bigadaj - I'm petrified of every decision I make because I'm not that savvy about pensions. But you're right we need to take the plunge. I'm going with the old adage 'don't put all your eggs in one basket' because I'm terrified of being a poor pensioner and losing everything.

jamesd

The pension is likely to make more than the debt. That particular debt is at an even lower rate than many mortgages, so like a mortgage it's not going to be best to pay it off any faster than required unless you run out of ways to make money at a higher rate than the debt. You're unlikely to run out of such ways, there are plenty around that beat 2.59% easily.

[Deleted User]

The unsecured loan is attached to our mortgage and we have our mortgage at the same rate. Apparently the BS made a mistake with the mortgage offers at that time by stating that after we come off the fixed we will pay 2.09% above the base rate until the 'end of the term'. This was before the crash & they expected us to be paying more when we came off the fixed rate. They have since revised their mortgages omitting 'end of the term' but have to honour the agreements made with this caveat. So we won a watch on that one!

The problem we have is the specter of redundancy always hangs over us and our LTV is high. So we just want to pay off this part of the mortgage sooner rather than later then start overpaying the mortgage. I will have an emergency fund in place before I start overpaying too as I will feel more relaxed if we can give our self some time to find a new job if it happens again.

However, you've made me think maybe I should have a look around at saving rates with the view to saving first, then paying off a lump sum in stages? I didn't think the savings rates on offer are that good at the moment.

atush

I'll say it again, split your 500. 200 into pension, 300 overpaying.

2 birds, one stone.

You'll start the compound interest for your pension future, while decreasing your LTV.

[Deleted User]

Yes, we've talked about it and this is what we are going to do. It feels right for our situation. I used the 'should I pay off my mortgage' calculator and it said we need a savings account that earns 3.2% before tax. I can't see anything out there that is offering that for us, plus the snowball effect will kick in when we start paying towards both.

Debt plays on our minds and peace of mind is priceless. We don't want to get caught out with the real possibility of losing our home, like we did the last time my partner was made redundant. At the same time we can't afford to ignore the pension situation, so a split of £200/£300 will make inroads for both situations.

Thanks for all thoughts it has been really helpful and much appreciated.

jamesd

You can get 6% taxable from the First Direct regular saver account and over 3.2% from several others.

What happens to the interest rate on the loan if you remortgage?

I'm wondering if you might later be able to remortgage at a lower LTV while keeping the unsecured loan. An unsecured loan won't count against the LTV of a new mortgage deal, just against the affordability calculation. If you can do this you could end up being able to save more by accumulating the money to overpay on the mortgage to get to lower LTV later.

[Deleted User]

I doubt very much if we could re-mortgage, my partners pay has dropped significantly since we got the mortgage. So we are actually not earning enough now for the mortgage we have, this is one of the things that started our problems. Also, I'm guessing if we could re-mortgage the BS would take the opportunity to rectify the mistake they made with our original mortgage offer.

I shall look at the First Direct etc.