Debt vs Pension vs Mortgage

kexy

Hello Moneysavers!

I'll share a little background facts before asking my questions.

• I currently have around £10,000 in unsecured Debt, across an interest free credit card balance, overdraft and long term personal loan.
• I currently pay 10% of salary direct to my pension, this is matched by my company
• In one month I will be moving into one of my OH's parent's properties for one year. They will be charging us the same rent as we currently pay, in one year's time they will gift us the money saved up in rent as a deposit to buy a house.

I've got a clear target to clear a majority of my Debt over this year. I've set a target of £7k. It's a stretching target and is going to take some scrimping and scraping to get there.

1. Does it make good financial sense to stop paying to my pension for one year in order to have extra cash to throw towards my debts?
2. What would the effect of doing this have on my attractiveness when applying for a mortgage in a years time? Would it look bad, or help since I will have less debt?

Thank you for your help in advance. And thank you for not judging.

Daniel54

kexy wrote: »

Hello Moneysavers!


I'll share a little background facts before asking my questions.

• I currently have around £10,000 in unsecured Debt, across an interest free credit card balance, overdraft and long term personal loan.
• I currently pay 10% of salary direct to my pension, this is matched by my company
• In one month I will be moving into one of my OH's parent's properties for one year. They will be charging us the same rent as we currently pay, in one year's time they will gift us the money saved up in rent as a deposit to buy a house.

I've got a clear target to clear a majority of my Debt over this year. I've set a target of £7k. It's a stretching target and is going to take some scrimping and scraping to get there.

1. Does it make good financial sense to stop paying to my pension for one year in order to have extra cash to throw towards my debts?
2. What would the effect of doing this have on my attractiveness when applying for a mortgage in a years time? Would it look bad, or help since I will have less debt?

Thank you for your help in advance. And thank you for not judging.

In general it is a bad idea and poor financial sense not to contribute to the pension.You are throwing away the employer contribution and paying tax on the money you keep.If you contribute by salary sacrifice,it is even worse as you are also saving 12% NI on your contributions

Are you sure you would have the discipline to resume pension payments

I gues a motrgage provider would rather you did not have any debt,but your pension contributions would show that you have the ability to take a long term view of savings

longtermplanner

Can you clear your debts if you don't stop the pension contributions?

leicestersq

It is your life, and your choice, please remember that.

If it were me, I would continue with the pension. Though the money is locked away, you are effectively doubling the money that you save thanks to your employer contribution. If you stop paying the pension, you are losing that free money.

Try and live as frugally as you can for the next year. Save money in interest bearing accounts rather than pay off 0% debts, but pay off debts where you can where the interest rate is higher than you can receive through saving.

kexy

Thanks for the replies.

Your advice aligns to my initial thoughts. My pension sacrifice is generating free cash as it's matched by my employer.

I can clear my debts whilst still paying the pension contributions but not as quickly. Certainly not within a year, unless is take on extra part time work.

dancingfairy

Stopping putting money into your pension is a bad idea:
1) it is tax free so you if you took the money after tax and used it to pay debts it wouldn't go as far
2) you get free money from your employer
3) if you stop now you might never start it up again (despite your best intentions).
4) the biggest/most important point about pensions is that it is a small amount which compounds over time. It is not just a years worth of money you are missing out on but the growth each year that that years pension would have earnt.
I wouldn't be overpaying your pension though, maybe you could reduce it to the amount that you employer matches it (I don't know how much of it is matched)?
df

Newyorkdreams

Keep the pension going. It's seems logical to stop while your paying your debt off but it's better in the longer-term. Completely agree with the tax free comments. I've just set up an AVC payment, just £30 a month, but as I'm a higher rate tax payer, I get 40% tax relief and it only reduces my bottom line by £18 a month. I have a lot of debt, but this will be cleared in a few years and the AVCs is a longer term investment (as is a pension). Reducing your debt will definitely look more appealing to a mortgage advisor as the rules have recently changed and they are more stringent with 'affordability'

FireWyrm

Pensions are not tax free at all, it is a deferred tax. You do pay tax on the money when you get it. The government gets you either way. Just to be clear on that. The other comments are sound. Your debt is 0% so it isnt getting any worse. With some frugality, you will eventually pay them off without them getting any bigger (you did destroy the mechanisms for spending more didnt you?) At the same time, I trust you have mechanisms in place to forestall any 'unforeseen' circumstances that usually mean unplanned credit card spending? It is no good being all frugal and paying debts if you dont have the means to deal with a broken washing machine or failed MOT. Broken washing machines are rare, MOTs are an annual event and you must carefully weigh the risk when setting off money.

I think your attention would be better spent perfecting a good tight budget that is workable, flexible but at the same time is designed to pay off that debt as fast as possible.

Newyorkdreams

Yes absolutely FireWyrm, my mistake although strictly speaking with public sector pensions you can draw down up to 25% of your pension pot as a tax free lump sum and 100% of an AVC pot if you joined the scheme prior to 31 march 2014.

longtermplanner

How much do your parents trust you? Because you will look better to mortgage lenders if you can show a record of consistent saving. Would your parents be happy if instead of paying them rent and them saving it up, you deposited that amount in an ISA each month? You could show them the statements!

Tixy

longtermplanner wrote: »

How much do your parents trust you? Because you will look better to mortgage lenders if you can show a record of consistent saving. Would your parents be happy if instead of paying them rent and them saving it up, you deposited that amount in an ISA each month? You could show them the statements!

Definitely this. It will look far better to a mortgage lender to demonstrate that you have saved your deposit monthly in to an account, rather than having to declare it as a gifted deposit from your in-laws.


In terms of your debts I would clear your overdraft first. But really try to clear as much of your debts as you possibly can, even if it means trying to get additional part time work you mention.
Obviously any debt you have remaining will affect your ability to get a mortgage or the amount you will be able to borrow.