Thousands of students have swapped a life of learning for their first job this summer – and they have a financial dilemma to comes to terms with.
For most who must work to earn their income, the choice is paying into a workplace pension or setting cash aside to repay their student loan.
Making the wrong choice can cost tens of thousands of pounds in later life, according to research by financial firm Royal London.
The company looked at if paying off a student loan quickly while foregoing pension savings was the best choice and found that this could mean having a £75,000 smaller pot in retirement.
Pension and student loan calculations
The research found:
- Graduates on average earnings can expect to have lifetime pension savings around £148,000 if they set aside the minimum amount under automatic enrolment – but they will not pay off their student debt and the balance will be written off 30 years after they graduate
- Graduates opting out of a workplace pension and paying their student debt instead will clear their student debt in 21 years, but even if they start pension saving as soon as the debt is repaid, they will only build a pot of around £73,000 – around £3,750 a year of annuity income in retirement
- A graduate on double average earnings will clear their student debt in 17 years if they opt out of saving in a pension, but they will still have a pension pot around £50,000 lower because of the loss of the employer contribution into their pension
Repaying the debt is a big mistake
Helen Morrissey, a personal finance specialist at Royal London said: “A new graduate may look at their student debt and want to get it down as quickly as possible, perhaps even opting out of their workplace pension to free up extra cash.
“Our analysis suggests that this could be a big mistake for most. Most graduates will never pay off their student debt in full and the balance will eventually be written off. Meanwhile, opting out of workplace pensions means losing the contribution from your employer, possibly over decades.
“Those who stay in pensions will see their money and their employer’s contribution grow over time and they will also benefit from tax relief on their contributions without any problems with their student loans.
“With graduate pension pots already facing a squeeze due to student loan repayments, any further reduction could pose a devastating blow to a graduate’s retirement fund. It is essential that employers and the government communicate the benefits of pension saving clearly to Britain’s new graduates.”