Rather than paying off your child's student loan, why not put that lump sum toward their pension?

HarveyMoose

My son finished university a year ago and is about to begin a career on a graduate scheme.  He will earn enough that he'll just begin to pay back his student loan; that suggests also that over his career he'll earn at a sufficient level to pay back his loan completely.  We're in the fortunate position of being able to pay off his loan now by dipping into capital.  From what I've read this is not a bad option though others, such as helping toward a house, could put that money to better use.  What I have not read anywhere so far is the suggestion that such a lump sum should be put toward your offspring's pension.  It seems to me a no-brainer: the amount instantly attracts 20% tax relief and, given it's 40 years until he retires, it would go a long way toward a good pension. 

Is this not the best option?

Spendless

I don't know enough about it, I'm sure someone will be along soon with a more adequate reply. My first thought is what happens to the pension  if child dies before being able to draw it or not long after becoming eligible for it?  Sad but happens to some.

I've no idea why parents pay off their kids student loans tbh. I believe around 83% never earn enough to pay the full amount and the amount owing after30 years is wiped off. If it was re-branded as a graduate tax I can't see anyone saving up to pay their kid's income tax.  

Username03725

If he's earning just enough over threshold to begin paying it back himself, he might be better off contributing to his own pension via salary sacrifice to bring his taxable income under the SL start point. He should also get employer contribution and ideally the employer NI savings too.

This is one of those where you have to sit down and do the sums to see whether him paying 9% additional tax till he's 53 is a greater benefit than paying it off, even though you'd have to make a number of assumptions about inflation and interest rates.

pphillips

Getting offspring to put money into pension means its got to be used for retirement, wouldn't a Lifetime ISA be a better option (government adds contributions at 25% to deposits up to £4000), which they can put towards buying a house or retirement.

Username03725

Indeed, a LISA is probably just as good, the point though was to do something that drops the salary to below the threshold and to retain the benefit of that money for the ex-student rather than seeing it disappear as additional tax. 

Again, it needs some thought to the calculation to gauge if and how much it would benefit the individual.

silvercar

Spendless said:

I've no idea why parents pay off their kids student loans tbh. I believe around 83% never earn enough to pay the full amount and the amount owing after30 years is wiped off. If it was re-branded as a graduate tax I can't see anyone saving up to pay their kid's income tax.  

Rather than the 83% figure quoted, which isn’t surprising given the interest rate charged on these loans, I would like to know what percentage  pay back as much of the loan as its value on graduation. That would give a fairer indication of whether it is worth clearing it early on. I’ve never seen this figure calculated.