Should I opt out of my 9.8% NHS Pension for one year to help pay off debt

[glow63]

Hi, I’m a 23 year old earning £42k working in the NHS. I’m in a relatively comfortable financial position apart from the fact I have around £6000 in credit card debt. I have recently transferred the balances of two credit cards to a zero interest card (12 months) to make paying them off easier. However, with my current take home pay of around £2,300 I can only afford to pay £300 off a month. I really want to be debt free by the end of 2024.

I was looking at my payslip and I noticed that my pension contributions at the moment are 9.8%, roughly £340 a month. I had the idea of opting out for just one year to help pay off the debt. I figured if I could use my pension contributions to up my repayments to £600 a month.

Here’s where I’m unsure. Whilst becoming free of credit card debt is super important to me, I would be missing out on around £5k from my employer towards my pension pot. However, I’m still young and intend on working in the NHS for a long time - how much of a difference will one year make?

I’d really appreciate any advice that you have!

 

[filu63]

@glow63 This one is easy, don't do it.

When you retire, this one year in the scheme at a £42k salary will be worth £778 of income every year of retirement. By opting out, you opt out of receiving this £778/year.

(Note that this £778/year is in today's money - the amount will actually go up by inflation each year.)

And you gain about £3k with which to pay off some debt that is literally interest free.

You're not even saying you'll invest it in something that will return more than this £778/year in retirement, you just want to hit an arbitrary goal earlier for personal satisfaction. Nope nope nope, don't!

 

[shadow2]

@filu63

the amount will actually go up by inflation each year

1.5% above inflation, so even more reason not to opt out!

 

[100cowgirls]

@glow63 Sign up for agency work. Pickup a shift a week and you can easily put an extra £800 towards the debt a month. Don’t ever drop out the NHS pension.

 

[ilooktogod]

@100cowgirls The minute you drop out of something, they can easily say next year, we can’t afford the current pension, the NHS offers to new staff members.

We will honour the ones still on the one rules.

 

[canadianatheist123]

@glow63 Hi, doctor here. Don’t opt out. The NHS pension is an excellent scheme, and it works by compounding the amount you contribute year on year. That 5K today will be worth 50k+ in 40 years. Stay in the pension and chip away at your loan as best you can!

 

[caramelalo]

@canadianatheist123 This just isn’t true? The nhs pension is a defined benefit pension paying 1/54th of your salary every year. https://www.wesleyan.co.uk/pensions-and-retirement/nhs-pension/guide#link2

say you earn £25,000 in your first year of service. Your pension for that year would be 1/54th of £25,000 = £463.

 

[jtanurdjaja]

@caramelalo They're not on £25k though, but on £42k.

£42k/54*1.015[sup]40[/sup] = £1411/year.

If they live for 35.5 years after retirement they will have received £50k in today's money from this.

 

[resjudicata]

@caramelalo You'll be compounding that £463 at 1.5% above inflation for the next 30+ years.

 

[diuspater]

@caramelalo That's the contribution to your annual income post retirement. So is £463/ Yr.

compared to the 9.8% contribution rate the pension is phenomenally good value.

 

[micro1984]

@glow63 Almost certainly not.

Not only are you giving up a huge amount more money as others have said, you also won't actually get £340 a month back as your pension contributions are taken from your gross (pre-tax salary).

So it would be more like £270 a month. To give up something that at current rates would cost you something around £1620 to buy a replacement for in retirement.

I'd look to see if you can find a cheaper way to pay it off though. How much are you paying in interest?

 

[glow63]

@micro1984 I’m not paying anything in interest until 12 months time - then it’s 26.49%

 

[micro1984]

@glow63 Then I'd keep plugging away at that for the next year then look for a loan at a lower rate to cover it. Market seems to be suggesting rates will be lower at that point too.

Not going to beat the c700% return you're getting on your pension contribution.