28 December 2017

Student debt could mean current graduate pension savings are a fifth lower

4 min read

Helen Morrissey, Personal Finance Specialist
Helen Morrissey

Corporate PR Specialist – Long Term Savings


New analysis from mutual insurer Royal London has shown that the cost of paying back student debt could reduce graduate pension pots by almost 20% compared with previous generations who graduated with no student debt. 

Having a degree still leads to higher lifetime earnings and a larger average pension pot than that enjoyed by non-graduates, but the gap between graduates and non-graduates is set to reduce as the burden of student loan repayments leaves graduates with less money to save into their pension.

Commenting, Jamie Clark, Business Development Manager for Royal London Intermediary pension business said:

"New graduates are already facing a squeeze on their disposable income which is making it harder for them to get a foot on the property ladder. But this analysis shows that a lack of disposable income is also likely to make it harder for them to save for the long-term as well. We estimate that graduates with student debt could easily end up with pension pots one fifth lower than the levels enjoyed by those graduates who enjoyed tuition-fee free education."

Royal London modelled the likely size of future pension pots for three groups saving through their working life:

  • A non-graduate on average wages;
  • A graduate with no student debt on average (graduate) wages;
  • A graduate with average student debt of £40,000, on average (graduate) wages;

As a graduate with no debt has higher disposable income than a graduate with debt, it is assumed that the debt-free graduate could comfortably afford to put into their pension savings half the amount they would otherwise have spent repaying student debt. The non-graduate and graduate with debts are otherwise assumed to save at the minimum rate required under the automatic enrolment legislation. The following table shows the estimated pension pots, in current prices, for the each of these cases:

Group Estimated size of pension pot
Non-graduate, non-graduate wages £85,000
Graduate, graduate wages, no student debt £185,000
Graduate, graduate wages, with student debt £150,000

In terms of annual income, and based on an illustrative annuity rate of 5%, the impact of a lifetime of repaying student debt would be a reduced pension income of £1,750 per year throughout their retirement.

Jamie continued;

"Although graduates are financially stretched, the figures highlight yet again just how important it is for everyone, including graduates, to start making any contributions into their pension as soon as possible. Increasing pension contributions with a pay rise and maxing out on any employer contributions available, which is effectively ‘free’ money, can really help to build pension savings to help secure a higher income in retirement. Waiting until finances are more comfortable and using some disposable income for pension savings, may then be too late."

Royal London recommends that anyone considering pension planning should speak to an impartial financial adviser, if possible, as they will be able to explain pension savings options available and the target fund they would need to secure the income they want in retirement. There is also information on workplace pensions on the Royal London website and savings tips on the Money Advice Service website.

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For further information please contact:

Helen Morrissey, Corporate PR Specialist – Long Term Savings

Notes to editor:

  1. Illustrative assumption of £40,000 graduate debt based on English or Welsh student with three years of tuition fees plus maintenance loans.
  2. The retirement incomes based on the illustrative annuity rate of 5% are £9,250 per year for a graduate with no student loan debt and £7,500 per year for a graduate with a student loan.
  3. Students with inquiries about loan repayments can contact the Student Loans Company via: https://www.slc.co.uk/students-and-customers/contact-information-for-customers/loan-repayment-enquiries.aspx

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.