Pensions - Articles - Graduate dilemma: pay student debt or save for retirement

 “Thousands of new graduates entering the workforce will be burdened with student debt but it could be a mistake to prioritise paying it off over saving for retirement. In the early years of their graduate career earnings come under enormous pressure from a variety of living costs. However, focusing on paying off large student debts could prove short sighted making them worse off in the long run.

 “Pensions come with valuable employer contributions that can kick-start their retirement saving. Deferring pension contributions until student debt has been repaid could be a very bad decision given this will typically take some time and means they lose ground on their pension savings.

 “Automatic enrolment means saving in the workplace has never been easier. Minimum contributions start low at 2% of a band of earnings gradually rising to 8% in 2019 making pension saving affordable and getting people into the savings habit early. New graduates start repaying their student loan following the April after they graduate, and then only once they earn £21,000 a year with repayments set at 9% only on earnings above the threshold.

 “A new graduate earning £22,000 a year pays only £7.50 a month towards their student loan. In return for paying the current minimum pension contribution of 0.8% of a band of earnings, of just under £11 a month, the graduate will benefit from another £16 paid into their pension from the government and their employer. Total pension and student loan repayments only add up to just over £18 a month, which may be more affordable than many new workers think. While these pension contributions may appear small, the effect of investment returns compounding over 30 years or more can mean these small contributions become sizeable sums by the time people reach retirement age and all for less than the cost of a round of drinks.”