Is a pension really worth it while trying to clear £15k credit card debt?
- Thread starter asuheel24
- Start date
@mjmichaels it sadly hasn't recovered. you're right, did save that tax, but the saving was wiped out.
i do feel though that paying into it gradually over time from early on is the right thing to do.
i do feel though that paying into it gradually over time from early on is the right thing to do.
mjmichaels
New member
@newcreation17
The scale is generally different and the costs of the debt are normally fixed so this doesn't really compare. Also note that paying into your pension is tax free so comes with an instant 20% minimum boost, which you are unlikely to save when paying off debts unless they are ridiculously expensive (and in that instance you could probably reduce them to a lower rate and thus still be in a better position paying into your pension).
The scale is generally different and the costs of the debt are normally fixed so this doesn't really compare. Also note that paying into your pension is tax free so comes with an instant 20% minimum boost, which you are unlikely to save when paying off debts unless they are ridiculously expensive (and in that instance you could probably reduce them to a lower rate and thus still be in a better position paying into your pension).
@therese1234 Completely appreciate where you're coming from - just edited my post with some further context to explain my thinking.
therese1234
New member
@asuheel24 [moving this to a top-level comment so others can see and add to it]
gloriainexcelsisdeo
New member
@asuheel24 Yes, the pension is worth it, especially considering the tax implications.
You should evaluate your other spending to clear your debt quicker.
You should evaluate your other spending to clear your debt quicker.
@miamijules Thank you, this is super helpful! I had always thought building an emergency fund wouldn't make sense with this much debt, but the financial adviser I spoke to recently seemed to be very for one.
I think I'll indeed opt for putting all of the inheritance towards debts and just build an emergency fund little-by-little with Monzo round ups etc, and then focus more on it when I'm debt-free.
I think I'll indeed opt for putting all of the inheritance towards debts and just build an emergency fund little-by-little with Monzo round ups etc, and then focus more on it when I'm debt-free.
@asuheel24 Personally I'd also pay off CC3 in full as well before putting the leftover into CC1- it's close enough to the interest rate of CC1 and I think the psychological impact of having one less minimum payment and one less debt will have a greater impact than being slightly closer to having CC1 paid off.
EDIT- Also not sure I've seen anyone mention them, but look into the snowball/avalanche methods. They're very similar, one targets the smallest debt first and the other the highest interest, but essentially every time you free up a minimum payment it gets rolled into whichever debt you are focusing on. Most effective way of paying off your debts!
EDIT- Also not sure I've seen anyone mention them, but look into the snowball/avalanche methods. They're very similar, one targets the smallest debt first and the other the highest interest, but essentially every time you free up a minimum payment it gets rolled into whichever debt you are focusing on. Most effective way of paying off your debts!
miamijules
New member
@asuheel24 Wish you all the best on your journey to debt freedom!
Having a plan and sticking to it is the best thing you can do here, so you're already on the right track! Keep it up
Having a plan and sticking to it is the best thing you can do here, so you're already on the right track! Keep it up
drstevejsock
New member
@asuheel24 I'd argue an emergency fund makes even more sense for somebody in substantial debt than somebody without.
Somebody without can easily take on credit to resolve financial emergencies, people with significant debt cannot.
I'd really keep like £500 aside and easily accessible just in case if you have the luxury of choice at your disposal.
Somebody without can easily take on credit to resolve financial emergencies, people with significant debt cannot.
I'd really keep like £500 aside and easily accessible just in case if you have the luxury of choice at your disposal.
miamijules
New member
@drstevejsock In this particular case, OP already has substantial amounts of credit available to them. Paying off the cards won't make that disappear and will instead free up available credit for other purposes - unless they decide to close the accounts too.
That £500 could instead be used for paying off the debt sooner, and thus racking up less interest.
An emergency fund is important, but these high interest credit cards take priority in my opinion. OP should definitely build up a safety net after they've been paid.
That £500 could instead be used for paying off the debt sooner, and thus racking up less interest.
An emergency fund is important, but these high interest credit cards take priority in my opinion. OP should definitely build up a safety net after they've been paid.
drstevejsock
New member
@miamijules Aye I think there's definitely arguments both way. If they have immediate credit available to them then I agree with you.
davidtitor
New member
@drstevejsock I agree. The reason most people get into debt at all is due to lack of savings and frivulous spending. The OP has already admitted they had a spending habit and are working on sorting that out. That should be their second priority after paying off the debts.
You would not need to take out a loan if you have the emergency fund/ savings in the first place. It's very disappointing to see so many people here who are financially iliterate encouraging others to adopt poor habits of opening more loans, paying unnecessary and frivolous pension contributions, and skimping on savings for emergencies. uncessary spending, debt accumulation and lack of regular savings are the fire triangle equivalent of getting into big financial trouble ie homelessness and bankruptcy.
The tax relief on pension contributions is minimal (and often zealously overstated) for the majority of people will make very little difference to their salary. Its a toss up of having £135 a month now at your disposal and paying off an extra £1500-2000 of your current debts or waiting for 40 years to get back a small pension by which time you might already have been deceased or found yourself in a nursing home with early onset dementia. The quicker you pay off the debt you quicker you can get a mortgage approved.
You would not need to take out a loan if you have the emergency fund/ savings in the first place. It's very disappointing to see so many people here who are financially iliterate encouraging others to adopt poor habits of opening more loans, paying unnecessary and frivolous pension contributions, and skimping on savings for emergencies. uncessary spending, debt accumulation and lack of regular savings are the fire triangle equivalent of getting into big financial trouble ie homelessness and bankruptcy.
The tax relief on pension contributions is minimal (and often zealously overstated) for the majority of people will make very little difference to their salary. Its a toss up of having £135 a month now at your disposal and paying off an extra £1500-2000 of your current debts or waiting for 40 years to get back a small pension by which time you might already have been deceased or found yourself in a nursing home with early onset dementia. The quicker you pay off the debt you quicker you can get a mortgage approved.
@asuheel24 You have to remember, pensions are designed by the government to protect people from themselves. The rules are meant to prevent people from ending up destitute in their old age and totally reliant on the state. They're intentionally highly incentivised.
In the kindest way possible, it seems like you are a person who needs protection from themselves when it comes to finances. Contribute to your pension.
In the kindest way possible, it seems like you are a person who needs protection from themselves when it comes to finances. Contribute to your pension.
@asuheel24 Generally, debt on a credit card will compound more interest than a pension will return. However, you also have to consider the tax benefits (probably a wash with CC interest for a basic rate taxpayer) and the value of the employer contribution, then discount the total sum at retirement vs. its net present value.
It’s complicated but generally, the answer is, if you can’t fund your current, future (pension) and past (CC) lifestyles, cut back on the current before the future.
It’s complicated but generally, the answer is, if you can’t fund your current, future (pension) and past (CC) lifestyles, cut back on the current before the future.
@asuheel24 What debts do you have and at what interest rates? Remember that opting out will mean you'll lose your employer contribution as well, so you'll be losing £3,600 a year into your pension if so. I think more detail is needed 
@happyteal More like £1,080 based on 3% minimum and OPs £150 pm contribution being the 5% minimum.
It really depends on the setup with the employer if these figures are going to differ
It really depends on the setup with the employer if these figures are going to differ
@happyteal I’ve just updated my post with some further info!