I recently moved company, and received a significant pay-rise. I really did not like the amount of money that was going towards my student loan, and it was having a very limited impact on the overall balance (being eaten away by interest). My options were either, decide to pay it off over the next few years (probably with a commercial loan) or taking money out of my house since I am at close to 20% equity, OR I could simply take the money that is going to the student loans company, and pour it into my pension.
Let’s do a working example to show how the figures play out. Below is an example of someone on repayment plan 2, earning £50,000. Their typical take-home is £2959.55, with £170 going to student loans.
However, if I used a salary sacrifice scheme and put 10% into my pension (or any kind of other salary sacrifice scheme), my student loan repayments would be reduced:
In example one, you are paying £1207.12 in tax and student loans. In example 2, you are paying £1030.80 in tax and student loan (including NI as a tax, not getting into that argument today!).
Your take home pay would go down by £240, but you would receive £416 in pension capital returning roughly 170% on your money instantly. This extra £176 of value you are getting each month, over the course of 30 years (say you started at 25 and wanted to retire at 55), you would be significant.
Assuming an 8% S&P growth rate – relatively conservative – you would end up with an EXTRA £248,026.79. Of course this is only if you put this in your pension!
This is just the EXTRA, your £416 payments each month – without employer contributions would amount to about £576k. Again this is without an contributions from your employer.
Obviously the next few months may not be the time to increase pension contributions, we all need all the money we can get, but, for those that can afford it, this would be a fantastic way to secure their future.
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