Debt, Personal Finance, Saving money

Can you afford to pay into a pension if you have debts?

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This is a guest post by Sara Williams, who writes about debt and credit ratings at Debt Camel.

It isn’t a good idea to have a lot of savings if you are paying high interest on catalogues, credit cards or loans.

But what about pensions? Should you pay into your employer’s pension scheme if you have expensive debt?

elderly couple sitting on bench

Your pension contribution may be going up

In the last few years ten million people have started paying into a pension for the first time through being enrolled in their employer’s scheme. That is a great success as before too many people weren’t putting any money aside for their retirement.

But the amount you are being asked to pay is going up. Most people only paid 1% before last year. Then that went up to 3%. And in April 2019 it is going up again to 5%.

That’s good as you need to be saving more for your old age. But you may be wondering if you can really afford this, especially if you have expensive debt you want to pay off.

There are three good reasons why most people should decide it’s best to pay these higher amounts.

Reason 1 – your employer is also paying more

It isn’t just you who is being asked for more.

The amount your employer is paying in will also go up to 3%. That is tax free money from your employer. If you stop paying in, so will your employer.

So this is like a wage rise for you, it’s just you don’t get it for a few years. It is still a big mistake to turn it down!

And you also get tax relief so if you pay basic rate tax, your “5% contribution” only costs you 4% and the extra 1% is put in by the tax man.

Overall from April 8% will be going into your pension – half from you and half from your employer and the tax man. It is a really good deal for you.

Reason 2 – it’s never a good time to pay into a pension!

There are always good reasons why now doesn’t seem like a good time to afford to pay into a pension. Not just debts, but you may be saving for a wedding or a house deposit. Or you may want to expand your family and move somewhere bigger. Or the kids may be off to university and need help from you.

If you stop saving now to pay off your debts, you may never start again for ten or twenty years. By which time it’s too late to save much before you retire.

No-one knows what the state pension arrangements will be like by that time. It’s not safe to assume you will be able to manage comfortably on a state pension so the sooner you start putting money aside the better.

The earlier you make contributions, the more time there is for them to grow into a good pension for you.

Reason 3 – pension takes priority over debt

This may surprise you, but the government says making pension payments is more important.

If your debts are so bad you have to choose a form of insolvency (bankruptcy, an IVA or a Debt Relief Order) then you are still allowed to carry on making normal pension contributions. The government doesn’t say you have to stop and use that money to pay off your creditors.

Should you ever stop paying into a pension?

This is ultimately your decision but think hard about what is best for you for the rest of your life, not just what will be easiest for the next couple of years. You will be retired for a very long time.

I think it’s a good general rule that you should pay in enough to get the maximum contribution from your employer. This is tax free hand-out and it’s rude to refuse it!

So look for other ways of clearing your debts. Cutting up those credit cards is a good start! You could look at Hayley’s Money Saving Resolutions to Actually Save Money This Year and use any savings to clear your debts faster.

If your debts are too big for those sort of changes to make much difference, talk to a free debt adviser about your options. I have a list of good debt advisers depending on what sort of debts you have, where you live and whether you would rather talk on the phone or face-to face.

 

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Can you afford to pay into a pension if you have debts?

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