Pension vs. paying off debt

hjscores · 20 August 2015 at 6:32AM

Hello

I am 31 and have just started a new job with a much larger salary of £57,500.

My employers have auto enrolled me onto the pension scheme (I've never had a pension scheme before) where I will pay 8.5% pension contributions so that takes about £200 off me each month (it's actually about £400 they take but tax relief or something means that I'm only £200 worse of a month).

The issue is that I have £22k worth of debt in a loan. With my new salary I was going to over pay on my monthly payments by £700 a month and get it down substantially.

My question is, should I pay into the pension and over pay a lesser amount on my debt or should I opt out, hammer the debt and when it's gone, opt back into the pension?
I think it will take me 1-2 years to pay off that debt fully (monthly set payment is only £375 a month) so I'll be 33/34 before I'll be able to opt back in.

Any advice or opinions would be greatly received!!

Thanks

Aretnap · 20 August 2015 at 12:50PM

To some extent it depends on the terms of the pension and the debt... But tax relief is turning your £200 into around £400 (if it's paid by salary sacrifice and your employer pays in their national insurance savings it would even be a little more than that), and if your employer matches your contributions that would be another £400. In other words you could be missing out on up to £800 of pension contributions in order to pay down £200 worth of debt. The interest rate on the debt would have to be pretty eye-watering before that was a good deal.

There might be other reasons for wanting to be debt free ASAP of course (eg if you have an upcoming mortgage application), but in purely financial terms the pension contribution is likely to be the best option.

hjscores · 20 August 2015 at 8:48PM

Thank you for that, that's what I thought. My interest rate on my loan is 6% which is really good for a loan that size but still, the pension is better.

Thanks again for responding.

atush · 21 August 2015 at 5:48PM

So if you can save 700 a month, the 200 into pension and 500 overpaying the debt?

That would mean you pay off an extra 6K per year? How much principal and interest do you pay each month anyway?

You should, so you dont get into debt, probably save a bit in cash alongside the overpayment at first. Just so you dont go into debt?

hjscores · 12 September 2015 at 6:50AM

atush wrote: »

So if you can save 700 a month, the 200 into pension and 500 overpaying the debt?

That would mean you pay off an extra 6K per year? How much principal and interest do you pay each month anyway?

You should, so you dont get into debt, probably save a bit in cash alongside the overpayment at first. Just so you dont go into debt?

Hi Atush, thanks for replying and sorry for the delay! I pay 6% interest on my loan and that's it.

I agree, I think I should save maybe £200 for myself or something to ensure I have a buffer should anything happen.

Brightspark87 · 29 October 2015 at 10:28AM

Hi

This pension is a lot of money but just think of the benefits in a few years time.

I have just gone through with my DH who is in a similar situation to you. We worked out that the loan;s interest rate would have to be over 300% interest to make stopping the pension worth while. So instead we rework the budget and ensured that he was making cut backs else where to help with the overpayments. Good luck!

MEM62 · 5 November 2015 at 11:25AM

hjscores wrote: »

I've never had a pension scheme before

As far as your pension is concerned you are already late to the party. If you want any quality of life in retirement make your pension contributions as generous as you can.

Dandytf · 18 January 2016 at 10:26PM

MEM62 wrote: »

As far as your pension is concerned you are already late to the party. If you want any quality of life in retirement make your pension contributions as generous as you can.

I'm also a late pensions saver.

Only a small pension from previous RM employment -1992-1999

I've in past year or 18 moths joined current employers pension and raised it from 1% to 3% 20015 and this year I'll be paying +5% (matched with employer).

I think if I can manage to pay + 5% it will make up for 'missing pension yrs 10)

next 3 yrs I'll continue to pay unsecured debt and make regular mortgage over payments.

Maybe after 3 yrs I'll re consider if I will increase pension to +7% or above.

Is there any reason not to increase 7% or above?

Pension vs. paying off debt

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