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?

I agree with you I think OP - I don't find myself able to sign up to the idea of a graduate tax of nearly 10% and for a huge length of time as something that's OK.

Some of my colleagues are in this position - they owe more now than when they graduated, and a big chunk of their salary disappears towards their student loans every month. Our role is demanding and specialised, and it benefits the population, but it doesn't really feel like the money they actually get in their pocket reflects that.

I wish MSE would have another look at this, and maybe consider their advice for families in 3 or 4 different financial situations.

We are in a similar position to you with a JISA that could be used to pay off the tuition fees or a house deposit.

I would suggest you should carry on saving into your pension. You will probably find that you want to pile money into it in the years prior to retirement. The MPAA only allows you to contribute up to 10K. If you have the money it’s worth contributing a lot more than that to get the government bonus.

The JISA would then be better used for the tuition fees. Assuming of course that your son wants to use the money in that way..

@Waspie i’d be really grateful if you can update this thread after you’ve seen the advisor, as my initial response is no to cashing in a pension for this reason….I have gone from being prepared to pay upfront to being happy to take out the loans, what I have read up on has really changed my mindset from “ it’s a bad idea to have a loan like that” to “ it’s a graduate tax” as the worked examples of how much someone pays back per month seem very reasonable .however I’m not expecting my d. to be earning into the higher rate tax bracket, plus as she’s female she may have time out of the workplace. I’m hoping that MSE update their loan calculator soon to include plan 5 .

When looking at the calculator make sure you change the option at the bottom to put the figures into today’s money. It has some very odd settings such as inflation at 8% which makes the numbers look huge but you will see that in today’s money the loan doesn’t cost much at all.
student loan interest next year is around 4.2% from memory and your money can earn more than that in a fixed interest account.

Honestly it's up to you. If you will still have enough left over comfortably to drawdown on then I guess you need to decide whether that's a good use of your funds or if it's stopping you doing something else. If it's not stopping you from doing something else then why not? I'm planning to use the tax free lump sum to repay the mortgage, all going to plan. I'm hammering money into the pension rather than overpaying the mortgage. If it's more than I'm forecasting then I'll be giving the kids a bit too who will be in uni by that point. But this is 11 years away.

The interest rate on loans is so high. Surely most uni students are going to earn enough to start paying it back pretty much as soon as they graduate. Unless you’re doing nursing or something low paid, or a female who you think may become a SAHM, it’s better to take as little loan as possible. It’s 40yrs to repay now. If you can support your child then don’t get the loan in my opinion. Being saddled with 40yrs of payments is surely best avoided if you can afford it, and sounds like you definitely can.

Just to update - I saw the pensions chap who said this was quite popular (to use drawdown to fund University costs) and it wasn't a bad idea per se, it would just depend on my circumstances. One thing he did say is not to draw down all of the 25% in one go, but to draw down in smaller amounts more regularly and to keep paying as much as I can into my pension each month. He also suggested that DP and I see an IFA to look at our joint position.

I now need to speak to DP so that we can work out what our joint pension position would be if I were to fund DS' university (or a decent chunk of it). His company is way more generous than mine at matching pension contribution (12% match over my 6%) plus he is a few years younger and earns around 20% more than me, so his pension will increasing at a quicker rate than mine. At the moment they are about equal as I contribute more via AVC and started my pension a few years earlier.

My tentative plan now is to increase my AVCs as far as possible to inflate my pension ahead of the first drawdown.

Thank you to everyone who shared their knowledge, experience, ideas and opinions with me