Student debt results in ‘20% lower pensions for graduates

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.

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The cost of paying back student debt could reduce graduate pension pots by almost 20% compared with previous generations who received grants and had no fees to pay, analysis from Royal London has shown.

The insurer said having a degree still leads to higher lifetime earnings and a larger average pension pot than that enjoyed by non-graduates – but said 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.

Royal London business development manager Jamie Clark 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.

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“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

“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.

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.

Clark added: “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.”

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