Pension Drawdown to fund University - very bad idea?

[Waspie]

I am fortunate to have a DB and a DC pension. The DB is an old Local Govt plan which will pay out approx. £5k per year from 60yo. My main pension is my DC pension where I currently have around £600k.

I will be 55 in 2026 (before the pension rules change in 2027) so I was musing whether it would be better to take the 25% tax free drawdown at this point and use some of it to fund my son's university years and the rest to pay down my mortgage.

He will start university in 2026. I will continue to pay into the DC scheme via my salary. I'm in a safe job which isn't under threat, and I should have at least 10 further years of monthly contribution before I plan to retire.

DP also has a good pension pot, and we are both high earners, so we are in a very fortunate position.

I have read the Martin Lewis MSE pages about taking the loans for students but I'm not convinced I agree anymore.

For info - DS also has a JISA which he'll get access to at 18yo which will give him around £40k. He could save this for a house deposit if he doesn't need to use it for university.

Is this the worst idea ever?

Someone who knows better than me will be along soon, but do read up on the money purchase annual allowance. Depending on how you start taking your defined-contribution pension I think you can be limited as to how much you can pay in in future.

www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa

Thank you @CherryFlan I'm sure I'm being financial naïve but I don't think triggering MPAA will adversely affect me as I don't contribute enough each year. I will certainly put it on my list of questions to ask the pension adviser (when I find one!)

As long as you do not access flexible benefits, in excess of your 25% tax free cash, then the MPAA is not triggered.

Although you do not currently pay in £10k per year, it is sensible to keep it available if necessary. In addition, all payments above the 25% will be taxed as income anyhow.

Understood - thanks @fromdownwest . Well at least neither of you seem to think it's a completely dumb idea! DP does. I'll discuss it with the pensions adviser I am going to speak to before I do anything.

Even more so, now people have to consider the death benefits of a DC pension. Depending on your total estate, that £600k DC pot could impact your total IHT position on the second death. So, accessing TFC makes even more sense post-2027

Will you have enough to live on to the standard you desire? Recommendation is taking 4% in drawdown each year, so if the pot is now smaller, you get less per year. Fine if you take the tax free cash to live off later, but potentially less fun if you have given it all away. You have referred to a partner, not a spouse, so if you separate then you only have your money.

If your son wants to go to university, surely he can use the jisa money for that and you gift him a house deposit later once you have a better idea on tfc from your db pension and the dc has had more of a chance to grow?

I've no idea on the pension side, but the standard advice is to fund uni through loans because he may well never pay them all back.
If you can afford to top up his means-tested living loan from your monthly salary, then no need to access extra money.

What will he study?
Is he likely to have a higher paying job that would mean he would pay it all back?

I once calculated that for my own job and being part time during kids younger years, I'll only pay back half of what I would have borrowed.
For my senior manager, they would pay back the whole lot.
Remember repayments are a % of income (above a threshold) not borrowing.

That was to be the original idea @SprigatitoYouAndIKnow . We've been saving into his JISA/CTF since birth.

I'm not so worried about standard of living post retirement as I'll still have a good DC pot as will DP (he is DS' father and we are civil partners).

You make the points DP makes and @fromdownwest, in her most recent post, is saying what I'm thinking now. I originally suggested to DP that I use drawdown as a joke, but it's been playing on my mind and I'm now thinking "why not?".

It's this standard advice from MSE that I'm now querying @House4DS. DS won't have maternity leave, is unlikely to work part time and he wants a career and a good degree, so he expects to be earning enough to begin paying back the loan very quickly. Obviously that may never happen but that's the gamble, isn't it?

Why not strike a balance, Student Loans to cover the majority of costs, and then DD to top up any shortfalls in costs?

An advance on inheritance less 40% IHT!

I joke, but if you both have good jobs, good DB pensions, and proportional wealth, then death benefits and risks, will come into play.

Your DB pensions will not be an issue for IHT, they will, however, provide indexed linked guaranteed income from life. With the DC pot, as a pot to draw capital from, as and when,

Yes. That's certainly an option I will consider. Another option would be to stop making monthly AVC contributions and save that money. I don't like this idea though as I'll be taxed at 40% on all of it so it seems like a silly choice financially.

Thanks for the replies. This has been helpful. I will book a meeting with the pension adviser and talk it through.

You can presumably take that lump sum at any time should you need it? So could use student loans but if there came a time you / DS wanted to pay it off you could access the cash then

What degree is he thinking of doing? My DC is on a 5 or 6 year degree so we have to top up maybe to 60k over that time.

We plan on helping him pay off his student loans by matching his payments. Depends what happens though.

How much does your DP have in his pot? Will he help with this idea?

This is a useful website.

www.yourstudentloancalculator.co.uk/

Can you not fund your DS's Uni through income and savings without touching your pension pot? If you are both high earners and I would assume as such you will have savings it should be possible to do it that way. I funded my DD's uni that way, like you I didn't really like the idea of her starting life with huge loans hanging over her, even if in practise she might not have to repay them.

Some AVC’s paid into a pension builder can be commuted 100% for tax free cash depending on the scheme. So stopping those, may not be the best option.

db and db blending is complicated, I would ensure the sassier is charted, you should really look for that as a minimum imo.

Student loans now only increase by inflation. If your pension can increase by more than this amount you are best to leave the money where it is, at least until after graduation.

I don't think it's a mad plan. You are still left with enough for a good retirement. And it will make you feel comfortable in relation to DS' costs.

We drew down a big pension commencement lump sum to pay for school fees as DD was having a dreadful time and needed to move schools. Yes, no-one would advise such a thing but it has worked for our family.

I agree with you OP that whilst Martin Lewis's advice is good advice for people who would not otherwise be able to access higher education if there is any way uni can be funded without the loan and not affect you that much you should do it. Its never a popular opinion on here mainly because it will attract the similar sort of envy that SOME have towards being able to pay for private education. The reality is far more than 50% will pay student loans back from now on. Why put your child through 40 years potentially of payments and paying for interest unnecessarily if you can comfortably help them now.

Thanks for your replies, I do appreciate the different points of view.

@catiscosy - yes, we could. But the pensions rules change in 2027 and also the interest starts to mount up from the moment the loan is taken. If I were going to pay it off my thinking is that I would be better off not taking the loan at all.

That student loan calculator is terrifying @Sycamoretree4 ! It's saying that it is likely to take even a decent earner at least 20 years to pay off a £50k (hypothetical) debt and it will be almost £130k paid back. Thank you for sharing this.

Payment matching is a good idea. DP would certainly be on board

Possibly @twomanyfrogsinabox but we live in an expensive area and have a large mortgage which isn't being paid off anytime soon. I also want him to be able to go to a London (or any other expensive city) university if he wishes and not feel like his choices are forcing his dad and I to curtail our life style. We could certainly pay rent, but fees would probably be difficult.

I agree about AVCs @fromdownwest - I am not really considering this as a viable option. I'm not going to try and blend the DB and DC pensions either. I've never read or heard of a good reason to do this.

I will do some calculations on this @Tearsofthemushroom. If he just has the loan for the three/four years of uni and then we pay it off the interest won't be such an issue and he'll have more idea of what he career he wants to follow by then. I like this idea as it's less of an upfront gamble.

Thanks @SizemoreJones I'm glad it worked for you. I hope your DD is/was happier in her new school.

I have also read that it's likely that far more students will end up paying back their full student debt too @Spirallingdownwards . It's really that knowledge, plus the DC pension changes which have made me start to consider this option seriously. The idea that we could allow DS to start his adult life debt free is giving me a warm and cosy feeling as I hadn't considered it a possibility before. I know that this is an absolutely privileged position to be in, and DS would know it too.

DS is thinking along the lines of economic history, IR, politics and economics, possibly with a law conversion afterwards. He's a good student at a super selective grammar so is targeting good grades and a top 10 (in the subject) university.

@Waspie sensible approaches to things.

You already have a blended db and dc scheme with the AVC and defined benefit elements to your pensions. The avc themselves are defined contributions.

So, understanding how to draw down funds from external DC schemes can impact your AVC’s

Apologies if you've addressed this in another post, but one thing to avoid would be lending him some money, but not enough to avoid him having to still take taking a loan (even if it was smaller than it otherwise would have been).

The student loan system is set up now so that most graduates will effectively be paying an extra tax all of their working lives. The actual balance they owe won't matter - they'll just be repaying a proportion of their income each month until the term expires.

You might think that him taking a smaller loan means he'll pay it back more quickly - and he might - but if he doesn't earn high amounts or takes periods when he is not working, then the interest (RPI + 3% I think) could mean the balance runs ahead of what he repays and is not repayable in time. He'll end up with the same burden of repayments and you will have lent him the money for no real benefit.

I think interest is just RPI now isn't it? Not RPI +3%?

I won't lend him money @EcoChica1980; it'll either be gifted or it won't happen

I think it's RPI only now (Plan 5) as @Hols23 says. The repayments would start when he earns £25,000 and he would pay for 40 years. The interest rate is currently 7.8%. Using the calculator previously linked this would mean that for a fairly modest £35k fees loan DS would already have racked up over £15k in interest by the time he starts work (assuming 4 years after the start of the undergraduate degree).

I'm going to get pensions advice @fromdownwest. I really need it as you can see that I have no idea of the implications of what I'm suggesting! I've contacted the company scheme provider (HL) and they are going to make an appointment for me.

Could you use some of it to pay off your mortgage and fund university living costs with the money you’d save from not having a mortgage to pay? I don’t think paying university tuition fees is a good idea.

C

I paid the children's student fees. I also cashed in my pension in completely at 55 (as I will work as long as I can well beyond retirement age as i work for myself). I used the money to help children with first housing and HMRC got a massive chunk of it to help the nation I suppose.....

My father (NHS doctor) put every spare penny into pensions, retired at 77 and died at 79 so pensions for him were not that great a deal.