Pension V Student debt

Coldred

Hello

I currently have an outstanding student loan debt of about 7k and pay about £120 a month towards repayments.

I pay into my pension about £150 a month (approx 6%) which is the basic % amount from my wages and my employer contributes (approx 3.5%), i am considering paying off my student loan and using the repayments that i would have used towards my student loan to top up my pension each month.

I am not sure if this is the better option over the long term so looking for some advice.

Thanks

1adf1991

the worst thing most people can ever do is overpay there student loan. its the cheapest loan you will ever get and gets wiped off after 30 years anyway.

I pay abit off throw ma wages ( the minimum allowed) but In 18 years time I'll have around £20000 of it whipped out. so why should I over pay this.

put it in your pension and clam 25% back straight away. plus the 8th wonder of the world compound intrest.

Coldred

Can you elaborate on some of those points in terms of overpayments and claiming back.

hugheskevi

What about the other various financial options, have you considered them all and concluded a pension or student loan repayment is better than all alternatives? The most obvious options you have (in no particular order) are:

(1) Precautionary, readily available cash savings
(2) Using current accounts and regular savers to get higher interest rates on savings
(3) Non-student loan debt repayment (credit card, car loans, etc)
(4) Saving for property deposit / mortgage overpayment
(5) Lifetime ISA
(6) Stocks and shares ISA
(7) Student loan repayments
(8) Buy-to-let investments
(9) Venture Capital Trust
(10) Pension

Any of the above could be the most appropriate choice, depending on individual circumstances.

As a general principle regarding pension, pay as much into a pension as necessary to fully benefit from an employer contribution. If the pension offers salary sacrifice, you receive means-tested benefits or you are a higher/additional rate taxpayer then further pension contributions may well be attractive. If none of these apply, it may well be preferable to invest in a stocks and shares ISA instead, contributing more to a pension when one of the features which make pension contributions particularly attractive applies.

barnstar2077

I would put it into a pension personally. For every £100 you put in the government puts in an extra £25. Although saving for a house may also be a priority, assuming you don't already have one.

hugheskevi

I would put it into a pension personally. For every £100 you put in the government puts in an extra £25.

I would argue that contributing to a stocks and shares ISA is preferable to a pension in the absence of salary sacrifice and higher/additional rate relief. To give an example of why:

Consider a hypothetical individual earning £30,000 who has £5,000 p/a to save.

They put that £5,000 into a pension. Basic rate tax relief increases it to £6,250.

Alternatively, they could put it into a stocks and shares ISA investing in the same investments as the pension at the same charge level. The contribution is £5,000 as it does not benefit from income tax relief.

5 years later, the individual is earning £60,000. Assume the higher rate income tax threshold is still £50,000. The individual now puts £10,000 p/a into a pension - the £5,000 they have been saving each year plus withdrawing £5,000 from the stocks and shares ISA to now move into a pension.

The £5,000 that was withdrawn from the ISA is increased to £6,250 due to basic rate tax relief. The individual also gets a £1,250 tax refund of higher rate income tax.

By the time all the money has been moved from the ISA to the pension, they have the same amount in the pension as they would have had through contributing when they earned £30,000 but they are £7,500 better off (5 * £1,250) due to benefitting from higher rate relief (ignoring investment returns for simplicity - they are neutral, as you are using the same investments and get tax relief on the returns when moved to the pension).

A similar process applies just replacing higher rate relief with salary sacrifice. Considerations such as pension money being ringfenced from means-tested benefit calculations and bankruptcy may be relevant. If individual discipline is a factor ("if I had it in an ISA I'd spend it") then the conclusion may be different.

barnstar2077

hugheskevi wrote: »

I would argue that contributing to a stocks and shares ISA is preferable to a pension in the absence of salary sacrifice and higher/additional rate relief. To give an example of why:

Consider a hypothetical individual earning £30,000 who has £5,000 p/a to save.

They put that £5,000 into a pension. Basic rate tax relief increases it to £6,250.

Alternatively, they could put it into a stocks and shares ISA investing in the same investments as the pension at the same charge level. The contribution is £5,000 as it does not benefit from income tax relief.

5 years later, the individual is earning £60,000. Assume the higher rate income tax threshold is still £50,000. The individual now puts £10,000 p/a into a pension - the £5,000 they have been saving each year plus withdrawing £5,000 from the stocks and shares ISA to now move into a pension.

The £5,000 that was withdrawn from the ISA is increased to £6,250 due to basic rate tax relief. The individual also gets a £1,250 tax refund of higher rate income tax.

By the time all the money has been moved from the ISA to the pension, they have the same amount in the pension as they would have had through contributing when they earned £30,000 but they are £7,500 better off (5 * £1,250) due to benefitting from higher rate relief (ignoring investment returns for simplicity - they are neutral, as you are using the same investments and get tax relief on the returns when moved to the pension).

A similar process applies just replacing higher rate relief with salary sacrifice. Considerations such as pension money being ringfenced from means-tested benefit calculations and bankruptcy may be relevant. If individual discipline is a factor ("if I had it in an ISA I'd spend it") then the conclusion may be different.

That does sound good. I am not sure that everyone is ready to manage their own stocks and shares ISA or transfer money at just the right time to save tax etc though. Maybe start by putting the money into the pension while educating themselves for this sort of plan in the future.

Albermarle

i am considering paying off my student loan and using the repayments that i would have used towards my student loan to top up my pension each month.

Are you aware that it should be OK to make a one off lump sum into your current pension as long as it is not so large it breaches the usual pension rules on annual contributions ?

Norwooder

hugheskevi wrote: »

I would argue that contributing to a stocks and shares ISA is preferable to a pension in the absence of salary sacrifice and higher/additional rate relief. To give an example of why:

I agree that if you are a basic rate tax payer and anticipate being a basic rate tax payer in retirement, employee payments in to a money purchase scheme are not that attractive (unless they attract some type of employer match). A better option in that situation may be to use the lifetime ISA as you get the same up front relief on the way in, but can draw on the way out without incurring a tax charge.

At £60k payments in to a pension are much more attractive due, as you say, to the higher rate relief. However I wouldn't advocate the sort of tax planning you suggest unless one has a high degree of certainty that one's income will grow within in a suitable time period to facilitate the tax relief.

The other info we don't have is the rate interest is accruing on the student loan debt. Impossible to give advice about pros/cons of pension as an alternative, without knowing the cost of the debt.

hugheskevi

At £60k payments in to a pension are much more attractive due, as you say, to the higher rate relief. However I wouldn't advocate the sort of tax planning you suggest unless one has a high degree of certainty that one's income will grow within in a suitable time period to facilitate the tax relief.

It doesn't matter whether salary grows or not - in the scenario where an individual neither gains access to salary sacrifice nor becomes a higher rate taxpayer, they can still move the money across into the pension. They end up in the same position as if they had put the money directly into the pension, but had access to the money (due to it being in an ISA) whereas it would have been inaccessible in a pension. At worst, they lose a small amount of buying/selling/transfer charges.

Norwooder

So if they never become a higher rate tax payer you would still advocate putting all the money into S&S ISA?