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!

Nest and SIPP are both pensions - there is nothing particularly magical about a SIPP over Nest as such. Nest just doesnt have a huge number of investment options (only 5) and charges an admin fee for payments in which most other pension providers don't do. SIPP will have more investment options but again will depend upon the provider. All pensions providers are going to charge some kind of managment fee and investment fund fees so you need to check those.

As you're 41 you could, for now, select a higher risk fund in Nest (like the sharia fund) and then decide whether to move it.

General wisdom from finance gurus is clear interest accruing debt before paying into a pension.

A third child will slow down debt repayments and pension contributions. In your late 50s/early 60s you could have 3 dcs who are wanting to go to uni and you will be expected to financially help them. That is a high burden.

I got into a similar level of debt in my 20s and finally cleared it in my late 30s. I'm close in age to you and I can now use those repayments to add to my pension and isa (which is our "college fund'). It's so nice not having credit card debt.

My perspective is this… you cannot have it all. So you are going to have to choose / compromise. If you want to spend more time with your kids and only work 2 days a week you will have less money, won’t be able to pay your debt off etc. if you have another child and stick to your not till their at school plan this will be another 5 ish years,

im self employed, its definitely hard not having a set wage but being able to work round my kids and make the most of my time with them is worth it. I will have to look at an alternative in about a years time if I don’t increase my earnings but my youngest will be at school then.

Thanks for clarifying the provider situation. I do have an old Aviva pension from my old career, I wonder whether I would be better off paying into that…

Have a look and compare the percentage growth of both. If your employed scheme is bad then you presumably have the power to change to a better one which would also benefit your employees.

But he it sounds like he is indirectly paying for your debt, because he's paying a bigger proportion of the bills. Disproportionately, I mean, because he does work more hours and have a higher income than you do, which should be taken into account.

Generally a couple with small children would either put everything in one pot for household expenses (including child expenses); split 50/50 or split according to income. It sounds like you are doing the latter, but your income is inconsistent and you pay "non fixed" bills which you can reduce if need be , enabling you to put money towards debt payments, while your DH picks up the fixed bills.

I think you need to consider what your priorities are. At the moment they sound be currently
-work 2 days a week to maximise time with young children
-have another child
-pay off debt
-increase pension contributions
-make business profitable so you can have consistent salary
-maintain your current "comfortable" lifestyle

It's simply not possible to do all of those simultaneously. I think you need a proper conversation with your husband to work out what it's fair for you to pay; how you will clear your debt, if you (both of you) need to prioritise your pension, or what the long term plan is. You should also be aware that relying on 0% credit cards is not a long term solution as you could lose access to cheap credit at any point.

You can only use carry forward if you have already used to the whole annual allowance (£60K) in the current tax year.

There was a recent example here of somebody who found themselves in exactly that position re bouncing debt from one card to another. And it was a very nasty financial shock to them. IIRC, they were in complete denial as to why it had happened.

Her DH's pension savings would need to reach £1million to get a pension which takes him into higher rate tax, retiring at 67 and including state pension, with the current tax bands. It will orobably be a lower threshold in real terms in 30 years time due to frozen tax bands, but iif he's paying in 10% on a £70k salary, that probably still leaves enough space for them to put any spare money into his pension for a few years.

Putting money into OPs pension would give the uplift, but unless she stops work before age 67 she'll be paying that back in tax when she takes her oension, apart from her tax free lump sum.

It probably makes more sense to put it in DH's pension whilst her earnings are low, but with the agreement from him that when she's back to work she'll have the chance to prioritise her work and get her earnings up - and at that point they'll put more into her pension to make up for it (still putting enough into her DH's for any contribution matching from his employer).

You could work more but choose to not. I don’t agree in your husband topping up your pension because you are providing the childcare - that’s your own choice so own it

Yes, at some point, especially as very low earner, the 0% credit will end and at best you might be able to get 4-6% interest but that would snowball pretty quickly since you are not in a position to pay anything off and by the sounds of it, isn't planning to be for many years.

OP, as a rule of thumb you'd expect a pension income of about 4% of however much you've saved up for your pension. That's roughly how much you can take from your pot each year after retirement, increasing in line with inflation (so your spending power stays the same) and expect it to last 30 years. Note that this assumes that you keep it invested during that time, and draw down the money each month.

You may choose to buy an annuity on retirement instead, which gives you a guaranteed income for life. How much you get for your money changes over time (depending on how they judge life expectancy and market returns) but it likewise will be roughly 4% for an index-linked annuity (the difference being that it's guaranteed however long you live... but if you die earlier you get nothing back)

You obviously have to do your own calculations at the time, but it gives you a rough idea of how much you need to have saved up for your pension.

Can you take a £0 salary and then pass your husband your tax free allowance? Not sure if this is allowed in your situation plus not sure how much it would help anyway.

OP, how do you think you will substantially reduce over £25k of debt this year without returning to work full time? Especially if you want to have another child?

You are 41 so do need to clear that debt and get some pension savings. I would discuss it with your husband as either he clears your debt (if you agree to pay him back, you also need a clear plan for that), you sell your business or sell assets to get a lump sum in and clear your debt, or you up your hours to get it cleared or you remortgage and pay it over a longer period. Him upping his pension contributions makes more sense than you doing so. I do think you need to have a joint financial plan going forward.

I mean this more kindly than it may sound, but you say you have a financially comfortable life at the moment, but in many ways you don't, when you are not able to be credit card debt free and make sufficient pension contributions. I would make those spending priorities after food and shelter and then see how that looks and what changes you need to make. It is good that you are thinking about this.

She should keep her salary so that she's paying NI and getting qualifying years for her pension.

You can also only share tax free allowance if the spouse is a basic rate tax payer, so at £70k they're not eligible.

I can take dividends as well as my salary and last year paid off £8k using a mixture of dividends and salary. I only really started putting effort in the letter half of the year, so I hope to be able to repay a bit more this year. I do genuinely think I’ll be able to clear it within the next 2.5 years. It does leave the business a bit more cash strapped, but I am determined to get the debt gone!

However, I am open to the suggestion of some
posters in asking my husband to help clear it now on the basis that I repay him.

How is that fair on her husband when OP runs a business that apparently generates £600k of annual revenue yet only pulls £1k a month salary which means she can choose to increase her salary or dividends.

I don't get how her business generates that much yet she can't earn more and has been throwing a £25k credit card from card to card without paying it off.

Hi OP, with all due respect, I think you need a reality check. You are saving 38 a month! That’s nothing. To give you a comparison, I work a 30 hour week and have done for the last 15 years. Before that I was full time for around 9 years. My salary is now around 43k. From my payslip I pay 230 a month pension contributions. My employer pays 1.2k a month, so roughly 1.5k a month into my pension. What’s shocking is that even on these figures my projected pension is 20k a year if I take it at 60. I am a single parent so only woke up to finances when I separated, was sailing along thinking all was good. I don’t want to work till I’m 67, I’m in my 50s now. So if I were you I’d be getting back to work, clear my debt, skip the third child idea and get saving. Otherwise you’ll be working till your 70.

You can’t afford another child!

For all those saying that she can't afford a 3rd child, doesn't it seem really wrong to you that a couple with one partner on £70k (£19k of which he hands over in tax and NI) and the other has built up a £600k turnover business which employs staff can't have a 3rd child they want... when the 2-child benefit cap is being lifted, giving people who aren't earning or paying tax an extra £3.5k per year for their 3rd child?

It's just wrong.

Most of the turnover gets spent on staff, rent, rates, and business running fees, then the rest gets reinvested. The company holds £150k in stock (cost price). My backup plan has always been to sell everything come retirement time but I don’t know how safe it is to just rely on being able to do that, which is why I’m looking for advice on the best way to proceed with our pensions.

I think it's because she obviously have some pretty hefty overheads. She is also paying staff to cover the work she isn't doing from that 600K. 600K isn's a huge amount of turnover if you have work premises and staff to pay for.

Ps the £1k salary was my accountant’s advice as being the most tax efficient way to max out personal allowance and maintain NI contributions. The balance it is supposed to be taken by dividend, which I do take but the amount varies.

Exactly this. That sounds like a huge amount, but it really isn’t. The bigger the business gets, the higher the costs get. I was actually wealthiest when the business was closer to 100K turnover and I was doing pretty much everything myself. But that was also pre-children when I had time to work 24/7!

At 41 you need to be paying hundreds a month into a pension and to be honest on 70k your husband probably needs to be contributing more than 10%.
These days you cannot assume pension pots will grow loads as the economy isn't good so you need to really plough money into pensions.