Reducing Pension to Tackle Debt

abaka

Originally posted on debt free wannabee's, but thought I'd run it by here also.
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So I've been on a debt free journey for little over a year.  Taking my debt from around £30k to just under 16k in that time.  However that was through selling some possessions and extreme cost cutting and several one off bonuses that helped me make significant reductions.  There is literally nothing left to give beyond what I get in my wages each month....and unfortunately today I have found out that my temporary role is coming to an end within the next 1/2 months....I do have a permanent post in the organisation I work in which I will return too....but the difference in take home pay would be around £500 a month....

I'm anticipating that with my drop in salary I should be able to continue to throw all my disposable income at my debts and have that cleared by 3/4 years.  However the thought of doing that for 4 years fills me with dread!! 

I've considered a DMP but the hassles of that outweight the benefits...As in, my mortgage and my day to day banking are linked to a bank which I have debt with.  So I don't want to ruin my relationship there....And I can still pay more than the minimum payments each month and all but one of them are currently on 0% interest so I'm still a good bit above water.

What I am considering is reducing my pension contributions in my workplace pension.  Currently I pay 6.5% of my salary into a Public Sector Work Pension.  I am considering reducing this to 3.25% for 24 months to help me get this debt cleared that little bit sooner.  

In terms of my pension.  I already have 9 years full contributions built up and considering I'm 36 now and likely going to be working until I'm 67 that means if I didn't reduce my contributions I'd have 40 years contributions at my retirement age.  If I switch for 2 years I'll still 39 years worth of contributions which will be a decent pot.  

What is the lesser of two evils.  Having more money in my pocket when I need it now and have expensive overheads to service or have a bit less money in my pocket when I'm retired and won't be paying mortgages/childcare etc....

Silvertabby

abaka said:

Originally posted on debt free wannabee's, but thought I'd run it by here also.
----------------------

So I've been on a debt free journey for little over a year.  Taking my debt from around £30k to just under 16k in that time.  However that was through selling some possessions and extreme cost cutting and several one off bonuses that helped me make significant reductions.  There is literally nothing left to give beyond what I get in my wages each month....and unfortunately today I have found out that my temporary role is coming to an end within the next 1/2 months....I do have a permanent post in the organisation I work in which I will return too....but the difference in take home pay would be around £500 a month....

I'm anticipating that with my drop in salary I should be able to continue to throw all my disposable income at my debts and have that cleared by 3/4 years.  However the thought of doing that for 4 years fills me with dread!! 

I've considered a DMP but the hassles of that outweight the benefits...As in, my mortgage and my day to day banking are linked to a bank which I have debt with.  So I don't want to ruin my relationship there....And I can still pay more than the minimum payments each month and all but one of them are currently on 0% interest so I'm still a good bit above water.

What I am considering is reducing my pension contributions in my workplace pension.  Currently I pay 6.5% of my salary into a Public Sector Work Pension.  I am considering reducing this to 3.25% for 24 months to help me get this debt cleared that little bit sooner.  

In terms of my pension.  I already have 9 years full contributions built up and considering I'm 36 now and likely going to be working until I'm 67 that means if I didn't reduce my contributions I'd have 40 years contributions at my retirement age.  If I switch for 2 years I'll still 39 years worth of contributions which will be a decent pot.  

What is the lesser of two evils.  Having more money in my pocket when I need it now and have expensive overheads to service or have a bit less money in my pocket when I'm retired and won't be paying mortgages/childcare etc....

LGPS, considering going for the 50:50 option?  If so, then that is exactly what it was designed for - to help fund members through a temporary period of financial stress, without having to opt out of the pension scheme entirely.  Yes, you will pay half rate contributions in return for half rate pension accrual, but death in service and ill health benefits remain the same.

Your eventual pension will be slightly less at the end, but not an horrendous amount.  And once you are back on track, you may wish to consider paying, say,  AVCs in order to top your pension back up. 

Hope it works out for you.

Dazed_and_C0nfused

The main problem with doing this is the risk you never revert back to the original contributions and you reach NPA and are utterly horrified how much you have lost out by

Silvertabby

50:50 members are automatically put back into the main scheme after, I think, 3 years.  Of course, the member can opt back into 50:50, but OP sounds determined enough to limit his time to 2 years.

Dazed_and_C0nfused

Silvertabby said:

50:50 members are automatically put back into the main scheme after, I think, 3 years.  Of course, the member can opt back into 50:50, but OP sounds determined enough to limit his time to 2 years.

Ah, that sounds like a good thing then.

xylophone

 In the circumstances (and congratulations on having the discipline to work so hard on reducing the debt), being able to reduce your contributions  for a period while retaining your DB pension is a boon.

If this is credit card debt, is there any prospect of a balance transfer to ameliorate the situation further?

mark5

Dazed_and_C0nfused said:

The main problem with doing this is the risk you never revert back to the original contributions and you reach NPA and are utterly horrified how much you have lost out by

I second this, I reduced my pension contributions while going through a divorce and it took me nearly 4 years after the divorce was finished to put my contributions back up.

Pipthecat

abaka said:

And I can still pay more than the minimum payments each month and all but one of them are currently on 0% interest 

How long do the 0% debts last?  Ideally you would not reduce your pension contributions in favour of paying back 0% loans unless it was impacting you in some other way.  My approach would be minimum payments on the 0% and focus on closing down the other debt first. 

QrizB

Pipthecat said:

abaka said:

And I can still pay more than the minimum payments each month and all but one of them are currently on 0% interest 

How long do the 0% debts last?  Ideally you would not reduce your pension contributions in favour of paying back 0% loans unless it was impacting you in some other way.  My approach would be minimum payments on the 0% and focus on closing down the other debt first. 

This is where the Pensions and Investments boards diverge from the DFW and MFW ones. Pensions and Investments see debt as another tool in the financial box, to be used and managed for holistic gains. And that's fine if you have the self-control to keep on top of them.

However, even a casual perusal of DFW will show that not everybody does.

Our OP says:

abaka said:

So I've been on a debt free journey for little over a year.  Taking my debt from around £30k to just under 16k in that time.  However that was through selling some possessions and extreme cost cutting and several one off bonuses that helped me make significant reductions.  There is literally nothing left to give beyond what I get in my wages each month.

They might not be ready for us to say "actually, debt isn't all bad, and cheap debt can help fund long-term investments".

And I say that as someone who took on £15k of cheap personal loan to buy a car that I could've paid cash for but didn't want to divest my SSISA!

leosayer

Pipthecat said:

abaka said:

And I can still pay more than the minimum payments each month and all but one of them are currently on 0% interest 

How long do the 0% debts last?  Ideally you would not reduce your pension contributions in favour of paying back 0% loans unless it was impacting you in some other way.  My approach would be minimum payments on the 0% and focus on closing down the other debt first. 

That would be my approach too.

Given what the OP has achieved in the past year and the way they have written I feel they could manage the complexity of this. 

I'm sure the situation seems bad now but their future self will be grateful they didn't reduce their pension contributions.

Albermarle

50:50 members are automatically put back into the main scheme after, I think, 3 years.  Of course, the member can opt back into 50:50, but OP sounds determined enough to limit his time to 2 years.

OP - The critical point seems to be not so much whether you pay reduced contributions for a while or not, but that you make sure that you  go back to full contributions asap.