14 July 2018

Graduates who make the wrong decision about their student debt "could miss out on £75,000 from their pension pot" - Royal London

7 min read

Helen Morrissey, Personal Finance Specialist
Helen Morrissey

Corporate PR Specialist – Long Term Savings


As young people around Britain attend graduation ceremonies this summer, many will face a choice when they start their first job between staying in a workplace pension or opting out and putting the money saved towards paying off their student debt.

New research from Royal London has found that graduates earning an average salary who opt out of their workplace pension, in order to pay off their student debt more quickly, are at risk of ending up with a pension pot £75,000 lower in today’s prices than those who do not opt out.

Royal London has found:

- An average graduate can expect to build up a pension pot of around £148,000 in today’s money if they contribute at the minimum rate required under automatic enrolment; they will not pay off their student debt and the balance will be written off 30 years after they graduate;

- The same graduate who opts out of a workplace pension and puts the saving into their student debt will clear their student debt after 21 years; even if they then resume pension saving, they will only be able to build up a pot of around £73,000 – losing just under half of their pension income, estimated to be £147,777, compared with the graduate who does not opt out; assuming an annuity rate of 5%, this equates to a reduced income of around £3,750 every year of retirement;

- Even higher earning graduates will suffer in retirement if they opt out of their workplace pension in order to clear their debt more quickly; a graduate on double average earnings will clear their debt four years earlier if they opt out of their pension; but the cost in retirement will be a pension pot around £50,000 lower because of the loss of the employer contribution into their pension;

According to previous research from Royal London, today’s graduates are already likely to have smaller pension pots than previous generations who graduated before the introduction of tuition fees. The Institute for Fiscal Studies has estimated that most graduates will still be paying off student loans in their 50s and that three-quarters of graduates will never pay off their student loan.

Helen Morrissey, 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 in order to free up extra cash. But our analysis suggests that this could be a big mistake for the vast majority. 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 a period of 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.

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. Therefore it is essential that employers and the government communicate the benefits of pension saving clearly to Britain’s new graduates."

- ENDS -

For further information please contact:

Helen Morrissey, Corporate PR Specialist – Long Term Savings

Note to editors

The table below provides calculations for graduates at four different salary levels, first on the assumption that they opt out of their workplace pension and second on the assumption that they stay in. It shows: a) how many years it will take them to clear their student debt, b) how large the pension pot would be in cash terms and in today’s prices and c) the difference in pension pot between the worker who opts out of pensions and who stays in.

Table 1. Opting out to pay student loan vs contributing to pension and paying minimum to student loan

  Starting salary Years to student debt payoff Retirement pot Pot in today's money Pot improvement if pay minimum to student loans co. % pot improvement if pay minimum to student loans co.
Opt out to pay Student Loan Average (£18,222) 21 £291,604 £72,685    
x 1.5 12 £566,112 £141,108    
x 2 9 £645,729 £160,954    
x 2.5 8 £667,976 £166,499    
Pay minimum to Student Loan Average (£18,222) 30 £592,864 £147,777 £75,092 103%
x 1.5 20 £809,471 £201,768 £60,659 43%
x 2 13 £849,565 £211,762 £50,808 32%
x 2.5 10 £857,525 £213,746 £47,247 28%

The assumptions used to calculate our findings are: 

Average Age of Recent Graduates 22
AE Contribution Rate (QEs) 8.0%
RPI 3.0%
Ave graduate debt £40,000
Investment Return 4.5%
Salary Inflation 3.0%
2013-18 RPI Increase Factor 111.5%
2018 Student Loan Repayment trigger salary £25,000
  • The 'average' graduate salary is based on official data in the *median* graduate.

About Royal London:

Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £117 billion, 8.8 million policies in force and 3,745 employees. Figures quoted are as at 30 June 2018.