Speaking their language – managing student loans with pensions
The biggest hurdle to overcome when selling an idea to someone is to engage their interest. Once the connection is made you ‘re off. Now this can apply as much to personal conversations as it can to business or sales scenarios. Equally though, there subjects or even words that are slam dunk conversation stoppers. Thus I often try to contain my enthusiasm should a dinner table conversation with friends drift towards the vexed subject of pensions.
So, after an excellent New Year’s Day lunch with old friends and their university-aged offspring, I was more than happy to listen to the students around the table describe their financial frustrations and challenges. I manfully resisted the temptation to assume a financial mother hen persona.
The conversation continued to dwell on finances giving a rather fine bottle of red time to start to work its magic. I chanced a one liner about ways of mitigating the burden of student loan repayment. Encouraged by the fact that eyes didn’t glaze over immediately I elaborated briefly and will paraphrase below.
To put it simplistically student loan repayments are calculated as 9% of income above a certain threshold. In 2014-15 that threshold is £16,910. One way to manage this would be to somehow reduce your income. I know that sounds a bit drastic, but bear with me.
In the case of child benefit HMRC starts to claw back benefit payments from any parent earning more than £50,000. For someone earning a little above that threshold, one way of “reducing” their income, and by so doing retain more or even all of their benefit, would be to make pension contributions. This works because the contributions are deducted from a person’s headline salary.
Unfortunately, student loan deductions are treated slightly differently inasmuch that from calculated before deducting tax or National Insurance contributions.
All is not lost, however. A technique known as “salary sacrifice” can be employed to barter a portion of your salary for additional benefits (usually in the form of a pension). This then does reduce your salary for the purposes of repaying a student loan.
Of course this might not be what you want to do and some people just want to repay the debt as soon as possible, which is fine. However, salary sacrifice can be a useful tool for younger workers who want to make an early start on their pension provision.
One further consideration for those either approaching, or actually in retirement, is that the age cap on student loans was removed in 2013. This, combined with an increase in the income limit from 2016 to £21,000, means that any pensioner undergraduate might never have to repay their loans if their pension doesn’t exceed the threshold. Better still, after 2016, the threshold will rise in line with average earnings.
So whilst these are two slightly off the wall financial strategies, they don’t have to be conversation stoppers