Debt-weight degree? Student loans and your retirement

  • 2022/23 graduates in England have an average student loan of £45,600
  • Someone that did not have a student debt burden and was able to divert the savings into a pension, could be £49,000 better off in retirement, in real terms

With university underway and freshers flu hopefully gone for another year, Standard Life, part of Phoenix Group, highlights the potential impact of student loan debt on the future financial prospects of the Class of 24/25 and their retirement savings. The research highlights the potential long-term financial trade-offs involved when pursuing higher education.

The average student loan in England is £45,600 for those who started their courses in 2022/23. For those on a Plan 2 student loan, repayments only start when income is over £524 a week (or £2,274 a month or £27,295 a year), over 30 years before being written off. Those with earnings over this threshold pay 9% of their income above the threshold towards the student loan, that’s a repayment of £42 per month1 based on a £33,000 salary. While clearly most students heading to university expect their degree to result in higher earnings throughout their career, the impact of student loan repayments at face value can have an impact on long-term savings. If the monthly repayments were diverted into a pension through monthly contributions instead, they could build up substantially throughout a working life.

Standard Life’s analysis finds that someone with the average UK student loan of £45,600 that began working on a salary of £25,000 per year, paying the minimum monthly auto-enrolment contributions (5% employee, 3% employer) from the age of 22, could have a total retirement fund of £192,000 by the age of 66, in real terms allowing for 2% inflation. However, someone that did not have to repay a student loan and instead diverted those savings into a pension up until the age 66, could find themselves £49,000 better off in retirement with total pension pot of £241,000 accounting for 2% inflation across a whole career. In nominal terms, or not allowing for inflation, the pot is much higher. This comes from diverting savings from student loan repayments each year, over 30 years, before being written off, into a pension.

Total retirement fund at age of 66*
Pension savings with student loan repayment Pension savings without student loan repayment and diverting those savings into your pension
£192,000 £241,000
  +£49,000

*if beginning working with a salary of £25,000 per year and paying 5% monthly employee contributions and 3% employer contributions into a workplace pension at the age of 22 and assuming 3.5% salary growth per year and 2% inflation. Annual Management Charge of 0.75% assumed. The figures are an illustration and are not guaranteed. Earning limits not applied. It is assumed that repayments are in line with student loan Plan 2, and that the figures for yearly repayments are diverted into your pension.

Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group said: “Many young adults will be heading off to university this month, with most taking out some element of student loan. With average student debt in England now sitting at £45,600, repayments have a genuine impact on take-home pay when you start to earn above the threshold and can add to the short-term versus long-term money dilemma when considering whether to boost your long-term savings.

“This should not put someone off studying or negate the value and enrichment many university courses bring, and a university education is of course a pre-requisite for many high earning professions. However, it’s worth considering the long-term implications of taking out a student loan and in reality it’s worth being aware of the fact that you may need to accept some impact on your take home pay if you are both repaying a student loan and saving a decent amount for retirement.”

ENDS

Enquiries

James Ikin
Lansons
07825 191308
jamesi@lansons.com

 

James Merrick
Standard Life
07974 063067
james_merrick@standardlife.com

Notes to editors

1 - Someone earning £33,000 a year would get paid £2,750 each month. £2,750 – £2,274 (income minus the Plan 2 threshold) = £476. Then 9% of £476 = £42.84. This means the amount you’d repay each month would be £42.

Calculations assume the following:

Starting salary £25,000
Employer contribution 3.00%
Employee contribution 5.00%
Investment growth 5.00%
Salary growth 3.50%
Inflation 2.00%
Annual investment cost 0.70%

Figures have been reduced to allow for inflation at 2%.

2 - Calculations are intended only for the sole purpose of providing an illustration regarding the projection of savings and pensions. They should not be used with the intention to give an accurate representation of real-world outcomes.

3 – Student loan calculator used to work out student loan repayments for the average student loan: https://www.student-loan-calculator.co.uk/

About Standard Life

  • Standard Life is a brand that has been trusted to look after peoples’ life savings for nearly 200 years
  • Today it proudly serves millions of customers who come to Standard Life directly, through advisers and through their employers’ pension scheme.
  • Standard Life is part of Phoenix Group, the largest long-term savings and retirement business in the UK. We’re proud to be building on nearly 200 years of Standard Life heritage together
  • Our products include a variety of Pensions, Bonds and Retirement options to suit people’s needs, helping our customers to invest and save for their future. We’re proud to offer a leading range of sustainable and responsible investment options.
  • We support our customers on their journey to and through retirement with comprehensive, easy-to-understand guidance so they can invest in the right way for their needs, and plan a future they feel confident about.
  • The value of investments can go down as well as up and may be worth less than originally invested.

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