Why Tax Relief and Write-Off Likelihood Make Pensions Beat Overpayments
You have extra money each month and a decision to make. Should you overpay your student loan to clear the debt faster, or should you increase your pension contributions to secure your retirement? Both feel like responsible financial moves, but they pull in opposite directions. Money can only be spent once.
The answer isn't straightforward because student loans in the UK work nothing like normal debt. They're written off after 30 or 40 years regardless of what you owe. Most people will never repay the full amount. Meanwhile, pension contributions receive generous tax relief and grow through compound interest over decades. These factors create a mathematical puzzle where the "right" answer depends entirely on your specific circumstances.
What complicates this decision further is that pension contributions, especially through salary sacrifice, actually reduce your student loan repayments immediately. Every pound you put into a pension through salary sacrifice is a pound that doesn't count toward the student loan threshold. So you're not really choosing between pension or loan repayment. You're choosing between reducing your loan and building retirement savings, or just paying down the loan faster while losing the pension benefits.
Pension contributions receive tax relief at your marginal rate. This means the government adds money to your pension based on what you would have paid in tax on that income.
If you contribute £80 to your pension, the government adds £20, making your pension pot £100. You've turned £80 of your money into £100 in your pension. That's an immediate 25% return before any investment growth.
You get 20% relief automatically like basic rate taxpayers, plus you can claim an additional 20% through Self Assessment or adjusted tax code. So £60 of your money becomes £100 in your pension, an immediate 67% return.
£55 of your money becomes £100 in your pension, an immediate 82% return.
If you pay an extra £100 toward your student loan, you reduce your debt by exactly £100. No bonus, no government contribution, no immediate return. The "return" comes from avoiding future interest charges on that £100 of debt.
Student loan interest rates vary by plan but currently range from RPI (around 3-4%) for Plan 5 to RPI+3% (potentially 6-7%) for Plan 2 at higher incomes. These interest rates are meaningful but nowhere near the immediate returns from pension tax relief. Just looking at tax relief, pensions appear to win decisively. But this ignores a critical feature of student loans: write-off.
Student loans are written off automatically:
This write-off means many people will never repay the full amount they borrowed plus interest. Research from the Institute for Fiscal Studies suggests around 75% of Plan 2 borrowers will have some or all of their loan written off.
If you're likely to have your loan written off, every extra pound you voluntarily pay toward it is a pound you'll never get back. You're voluntarily repaying debt that would have been forgiven anyway.
Think about it this way: If you overpay £5,000 toward your student loan today, but 20 years from now the remaining balance (including that £5,000) gets written off, you've essentially given away £5,000 for nothing. That £5,000 could have been growing in your pension for those 20 years instead.
This transforms the question. It's not "should I pay down debt vs save for retirement?" It's "should I voluntarily repay debt I might never have to fully repay, or should I take free government money and compound returns in my pension?"
Salary sacrifice pension schemes create an additional benefit that directly reduces student loan deductions immediately.
With salary sacrifice, you agree to reduce your gross salary in exchange for your employer paying that amount directly into your pension. This happens before PAYE calculations, meaning your reduced salary is what gets assessed for tax, National Insurance, and student loans.
Sarah earns £35,000 annually and currently contributes £100 monthly to her pension (£1,200 annually). She's considering increasing this to £300 monthly (£3,600 annually) through salary sacrifice.
Sarah saves £324 annually in student loan payments while also building her pension. She's getting tax relief on the pension contribution (immediately turning £2,880 into £3,600 with basic rate relief), she's saving £324 in student loans, and the money is growing in her pension with compound returns.
Salary sacrifice creates a double benefit that overpayment can never match. You reduce your student loan deductions AND you get tax relief on pension contributions. Our student loan calculator help you model exactly how much salary sacrifice saves in loan repayments.
Whether you'll have your loan written off depends on several factors:
Running the numbers through projections, Tom will repay approximately £40,000 over 30 years before write-off, leaving £45,000 (including accumulated interest) written off. Every pound Tom voluntarily overpays is likely wasted because he won't pay off the loan before write-off anyway.
Amanda is on track to repay her full loan within 15 years. The write-off won't matter for her because she'll clear the balance before then. For Amanda, every pound of overpayment genuinely reduces her debt and saves future interest. Amanda might consider overpayments, but she should still compare the student loan interest rate against the returns from pension investment.
Use our Total Loan Cost Calculator to project whether you're likely to repay in full or have your loan written off.
Your age significantly affects this decision because it determines how long your pension has to grow and how many years remain until loan write-off.
Young professionals should almost always prioritize pensions over student loan overpayments.
Most people in this age range should still prioritize pensions, though the calculation becomes closer for very high earners with smaller loan balances.
This age range requires careful calculation. For most borrowers, pensions still win because 15-25 years is substantial time for compound growth.
Even here, pensions often win unless you're absolutely certain you'll repay the loan in full before write-off and you're already maximizing pension contributions.
Compound interest is why pensions are so powerful. Money invested in your 20s and 30s has 30-40 years to grow exponentially.
Imagine investing £200 monthly from age 25 to 65 (40 years) with 7% average annual returns:
Now imagine instead using that £200 monthly to overpay student loans. You pay down your debt faster, saving perhaps £15,000 in interest charges over the life of the loan. But you've missed out on £429,000 of investment growth.
£100 invested at age 25 becomes approximately £1,500 by age 65 at 7% returns. The same £100 invested at age 45 only becomes £387. Every year you delay pension contributions costs you multiplicative returns. Every year you overpay student loans that might be written off costs you those lost returns.
High earners face different mathematics. If you earn £70,000+ and have a modest loan balance, you might genuinely repay the full amount well before write-off.
For these borrowers, the question becomes: is the pension return (after tax relief, investment growth) better than the student loan interest rate I'm avoiding?
The only scenario where student loan overpayment might compete is if you're a higher rate taxpayer with a small loan balance, planning to pay it off in just a few years anyway, and you value being debt-free over maximizing financial returns. But mathematically, most high earners should still prioritize pensions, especially through salary sacrifice arrangements.
Numbers don't capture everything. There's genuine psychological value in being debt-free, even if the debt is "good debt" like student loans.
Some people find the mental burden of having a £40,000 student loan balance outweighs the mathematical benefits of pension investment. They'd rather clear the debt and feel free, even if it costs them financially in the long run.
This is a legitimate personal choice, but it should be made with eyes open to the financial cost. If being debt-free is worth £50,000+ of lost pension growth to you, that's your decision. But understand what you're giving up.
Many employers match pension contributions up to a certain percentage (often 4-6% of salary). This is literally free money.
Always, always maximize employer matching before considering any form of student loan overpayment. If your employer matches up to 6% and you're only contributing 3%, you're leaving 3% of your salary on the table in free money.
If your employer matches up to 5% and you're currently contributing 5%, increasing to 7% means only the additional 2% gets matched. But that 2% employer contribution is still valuable. However, if you're not maximizing employer matching, you should absolutely do that before even considering student loan overpayments.
Given the complexity, using specialized calculators helps enormously. Our Pension Salary Sacrifice Effect Calculator shows exactly how much salary sacrifice reduces your student loan payments while building your pension.
Combined with the Student Loan Overpayment Calculator, you can model both scenarios side by side and see the projected outcomes.
The calculators project what happens under different scenarios, helping you make an informed decision rather than guessing.
There are limited scenarios where overpayment could be justified:
If you have £15,000 remaining and earn £65,000, you'll clearly repay in full within a few years. Overpaying might make sense to clear it faster, though pension still likely wins mathematically.
Student loan obligations continue when you move abroad, but enforcement is inconsistent. If you're leaving the UK and want to fully clear the obligation before going, overpayment might be strategic.
If the debt genuinely causes you distress beyond what the numbers justify, paying it off might be worth the financial cost. Mental health has value.
If you're hitting the annual pension allowance (currently £60,000) or lifetime allowance concerns, and you have additional money to deploy, overpaying the student loan becomes more reasonable. But this applies to very few people.
For the vast majority of borrowers, pension contributions through salary sacrifice are financially superior to student loan overpayments.
Looking at the mathematical reality:
The only real exceptions are borrowers who will definitely repay in full, have strong psychological needs to be debt-free, or are already maximizing pension contributions.
For the typical graduate with £40,000-£60,000 in student loans earning £30,000-£50,000, pensions are the clear winner. Use salary sacrifice to reduce current student loan costs while building retirement wealth. Let the loan run its course and accept that whatever remains will be written off in 30 or 40 years.
Every pound you put in your pension today, especially through salary sacrifice, does double duty: it reduces the student loan you're paying now and it grows for decades through compound interest. Every pound you overpay on your student loan does neither. It just reduces debt you might never fully repay anyway. The numbers are clear. For most people, pensions beat student loan overpayments decisively.
UK Education Policy Specialist
With over 15 years of experience in UK education policy and student finance, Dr. Sharma founded Student Loan Calculator UK to help students navigate the complex world of student loans.