Worried about debt / pension contributions

[newname2668]

I run my own business and absolutely love what I do, but I am concerned about my personal debt / pension situation.

I have 2 preschool aged children. Since the birth of my first child, I have taken quite a big step back in my business and I now only go in 2 days a week. I do all childcare on the other days. I love that I am able to spend so much time with the kids so I don’t plan to return to work full-time until they are both in school. However my personal earnings have reduced as a result. My official salary is £1k per month but I can take dividends on top of this. I used to be able to take reasonable dividends but now I work fewer hours, I’m having to pay higher staff costs. This means that there are some months that I don’t take a salary because cash flow can be tight. I do have months where I can take a few thousand out as a dividend and that will tide me over for several months, but I feel like I don’t have a predictable, reliable wage.

My husband earns 70K but works very long inflexible hours. He pays the mortgage and all big bills plus our socialising and holidays. I pay for half the food shops, running my own car/phone and kids clothes and activities. However I was irresponsible when I was younger and have over £25k in credit card debt that I keep bouncing from one 0% card to another. I am really making an effort to get rid of it this year and that’s where most of my wages go.

I have £19k in a pension plan from my old career and have only recently started paying into a pension through my business. However it’s only £36 per month because my base salary is so low. I have no idea what level of contribution I should be aiming for in order to provide enough for retirement but I’m fairly certain £36 a month is insufficient. My husband does have a more substantial pension pot and he pays in at least 10% but I don’t know that it will be enough for the both of us to live off come retirement age?

I’m worried that I need to increase my pension payments, but if I do so, my debt repayments will reduce. I feel like I’m stuck in an endless cycle of credit card debt that I can’t seem to shift! I have looked at debt charities but most of the options available will have an effect on my credit status so I don’t want to go down that route.

I have seen people talk about their husbands paying into their pension on MN before. How does this work? Would there be any benefit tax wise for the husband in doing this?

I don’t really know what my question is, and I know that really, the only way to improve my finances is to put the children in to childcare and work more hours. But if anyone has any other sage advice, it would be gratefully received!

You don't say how old you are but you're right, that pension is unlikely to give you the lifestyle you want.

Does your husband know about your debt?

Sorry - I’m 41.

He knows the debt exists but doesn’t know the exact figures. I would like to sit down with him and come up with a financial plan for the future, but I’m not sure how on earth I put any kind of plan in place with what I am earning at the moment.

How old are the dc? When will both get the free 30 hrs?

The most tax efficient way to take money from your business is to pay into a pension. A SIPP or similar.

Sounds like the business isn’t cash rich though, what’s your plan there? Will the business improve when you return FT? Is that the plan?

Thanks so much for the replies.

The children are 1.5 and nearly 4 but we are hoping for another this year.

The business has a pretty high turnover (£600k) but bills have escalated over the past few years and my staff costs are at an all time high. My plan has been to pay others to do my job and keep the business ticking over whilst I have time with the family, then when I’m ready to step back in, I can hopefully make it more profitable again. I definitely feel that my absence has an effect on profitability.

I currently have a nest pension through the business (which is just what all my staff have) but I don’t know whether I should be paying into something better? Would a SIPP be different to the nest pension?

Your dh can save 40% tax by paying more into his own pension.

Re dh paying into your pension. You have taken a hit on income to care for his children. It is fair that he pays a proportionate amount of the bills (which he maybe is?) and possibly into a pension for you.

I say possibly because you are married and so entitled to half his pension so you don't need to worry so much about what happens if you split. I would say that if youre both inclined to keep your own money then it's needed otherwise hell have a great retirement off the back of your free labour.

You're worried about debt and pensions yet you're hoping to have another child this year? That's saying that you're not really worried about money.

What’s going on with your state pension? If you’re not drawing a salary, then you’re not paying NICs for the full 52 weeks to get a full year towards the state pension. I’d at least be claiming child benefit as an NI only claim for yourself.

You need to come clean on your debt to your husband. Shocked he doesn’t know as it seems to predate your marriage. That is a kind of financial infidelity. You will probably have to sacrifice the only work two days a week dream to get your debt paid off. It’s a luxury you cannot afford.

Either that or sell your business, pay off your debts and then look for a new job.

Get your husband to pay £2,448 per year into your pension (£2,880 minus your £36 per month currently paid). You will get 20% tax relief on the £2,880 total even though you are below the tax threshold. It’s £720 per year of free money, so it’s a no brainer.

Do not rely on your husbands pension pot covering both of you in retirement. The tax relief doesn’t work that way. Pensions are just savings with deferred taxation - ie you get tax relief when you pay it in, but you get taxed when you withdraw it. So if he is going to have to draw twice as much out (to cover two people) it will be taxed at a higher rate on withdrawal, effectively devaluing the pot. There is no way to split a pension pot for a couple to each get tax relief, other than divorcing.

Your debt is high and pension savings are low, what about other savings? Quite honestly it doesn’t sound like you have a high enough income for the lifestyle you want now and in retirement. Don’t count on going back full time when DCs start school, I found it harder to work more when mine started than in the younger years as there’s a lot of school events, activities DC wants to do and I also don’t want her in full time wrap around. I’d get to a point now where you’re working enough to give you the extra income you need to pay off debt faster and increase your pension payments to a decent level, then stick at that whilst in primary school.

To be blunt, why on earth are you considering another child when you already have debt and can’t afford to pay into a pension?

this is going to sound harsh but what is making you think a third child is affordable before you have paid off debt? I think you need to get back into your business and get back to work to make it profitable again.

I say this as a business owner who was back at work with a 3 month old in tow.

Then I’d set myself a target of paying back the debt asap. You can go back and use 3 years of pension allowance I think so I’d worry about that when the debt is gone

Ok to address the baby criticisms which I do understand - if I was just living off my own income, I absolutely wouldn’t have another baby and it wouldn’t be affordable. However, our household income is comfortable. We don’t worry about making mortgage payments or paying household bills or the food shop and we have a nice social life. I just don’t feel comfortable asking my husband to repay my personal debt (which he does know about - I haven’t defrauded him in any way as suggested. He just doesn’t know the exact figures in the same way that I don’t know the exact figures in his accounts). We have always had independent finances, but I am open to changing this. I do plan to repay the debt within the next couple of years but I can’t wait until then to have a baby unfortunately, it’s now or never because of my age.

Ok this is really helpful, thank you so much!

And I do take on board all the comments about earning more now and agree that is what I need to find a way to do.

You’re not serious about paying down your debt if you’re thinking of having a third child
your DH’s income is high but not that high to support a family of five and he may be secure now but who knows
your two days per week won’t make a dent in paying off £25k - you need to be earning / working much more
You are only 41 - you should be aiming for peak earnings in the next decade and building your pension pot

While this is true, as a couple you will be better off if he pays more into his own pension as he will benefit from a reduction in the upper rate tax bracket and it is unlikely that he will be upper rate on retirement.

You’re minimising everything
a third child could be twins!! You simply won’t pay off £25,000 in two years working two days a week / being on mat leave
your DH may think your debt is £5k - you haven’t told him
because you know he’d be shocked
start being honest about your position and make decisions based off that

What's DH's longer term earning potential? 70k isn't masses for very long inflexible hours is he going all out for a promotion or something?

On the pension it's not really tax efficient for him to pay into yours I disagree with the previous poster. You (as a couple) are losing 20% by paying into a pension for you from his post tax earnings. There are situations where you end up pretty tax neutral because he pays 40% on withdrawal but by the time that happens you've had years of compounded growth on that 20%. So you're still streets ahead overall.

Edited to add - that's also without doing the sums on how the reduction in his taxable salary impacts on his tax free portion.

As mentioned re pension, get a SIPP, the 20% add in by the Government will really help you start building.
Re debt, money saving expert for advice.

She's getting the 20% already in her workplace pension no need to open another.

The golden rule of family tax and financial efficiency planning is to try to use each person's lower tax band in full before anyone goes into the next band.

At the moment you have one person on £70k, so you are subject to the high income child benefit charge on £10k and HR tax on £20k, and one person not using their basic rate band in full.

If you are serious about improving things, your husband should put at least £10k a year into his pension so the family keeps all the child benefit, and you should rearrange your childcare so that you earn as close as possible to £50k, which sounds eminently possible if you took the decison to. A third child will delay your return to earning capacity by another 3 years which is a huge issue at 41; you need to be putting £20k a year into your pension to have enough, by the "half your age" stats and given your existing pot is tiny. It was in the news that you need £800k in a pension to retire comfortably and you only have 25 working years to get there.

Sorry OP, it's not what you want to hear, but you really can't afford a third at your age and with your debts and lack of savings if you want to be comfortable later in life, never mind offer your children a leg up (which that generation desperately need) or an inheritance.

He is due a pay rise imminently which is currently being negotiated. He’s asked for 100K which is a bit cheeky - the response wasn’t a no but I expect he’ll land on 85K for now. He also gets an annual bonus in excess of 20k.

Can't he pay off your debt with the bonus and if he feels its necessary (I would) you pay him back