Buying Additional Pension For Teachers: Good idea?

Sun-Is-Fun · 31 October 2014 at 12:14PM

I have been a teacher for just over 20 years now and have just over 18 years pension service due to a couple of breaks. By next July, according their pension calculator, I would get approx £8500 per year at retirement.

Due to the very stressful nature of the profession nowadays, I have been considering taking a different career path.

Because of this, I have been thinking a lot about boosting my pension. I have looked into SIPPs and was all set to go, but then I stumbled upon buying Additional Pension Benefits (APB) for teachers.

For example, to buy £2000 of addition pension would cost approx £26,500 for my age. I can claim 20% of this back in tax relief, so would have to pay net approx £21,200. This is index linked to inflation rises.

Before I commit to this, can anyone advise whether I'd be better using my savings into something else which is better?

To me, this seems the best, risk-free solution?

kidmugsy · 31 October 2014 at 12:51PM

mjfp509 wrote: »

I have been a teacher for just over 20 years now and have just over 18 years pension service due to a couple of breaks. ... I have been considering taking a different career path.
I have ... stumbled upon buying Additional Pension Benefits (APB) for teachers. For example, to buy £2000 of addition pension would cost approx £26,500 for my age. I can claim 20% of this back in tax relief, so would have to pay net approx £21,200. This is index linked to inflation rises.

How old are you now?
At what age will you be able to draw your teacher's pension?
What is the inflation-protection deal: CPI-linking?

Sun-Is-Fun · 31 October 2014 at 1:00PM

kidmugsy wrote: »

How old are you now?
At what age will you be able to draw your teacher's pension?
What is the inflation-protection deal: CPI-linking?

I am 44. I can draw pension at 60 years of age or 55 (but then it is reduced by approx 25%). It is CPI linking.

kidmugsy · 31 October 2014 at 4:33PM

mjfp509 wrote: »

I am 44. I can draw pension at 60 years of age or 55 (but then it is reduced by approx 25%). It is CPI linking.

You're looking at an annuity-like return of nearly 10% p.a. index-linked. That sounds good but of course you should allow for doing without the £21,200 for 16 years. Still, you would carry no investment risk though there must be some political risk.

I'd guess (but there are people here much more knowledgeable about government employees' pensions than I am) that it's a pretty attractive investment IF you are confident of being able to wait until 60 to draw your pension. I suppose you'll anyway want to keep earning to around 60 just to make sure you've got your 35 years worth of National Insurance contributions.

How about other features; do you value the widow's pension, is your own health good, are you from a long-lived family ....?

Rough sum: suppose you put the £21200 into a SIPP and made 3% p.a. "real" (i.e. above inflation) after all charges. In 16 years it would become £34000 in real terms. If you bought an index-linked annuity with that (at current rates) then you'd be looking at somewhere around £1000 p.a. in real terms. So if the £2000 p.a. is also "real" (i.e. index-linked) it sounds attractive to me.

hugheskevi · 31 October 2014 at 5:13PM

Added Pension is a completely different sort of investment than a personal pension, and which is best will depend on individual circumstances.

In general, if what you want is more guaranteed income in retirement then Added Pension is going to be very competitive. The more you want something to fund early retirement or to provide a capital lump sum then the less attractive Added Pension is.

The implicit rate of return in the Added Pension calculation is CPI+3%. That is a good return for 'risk-free' investments, but quite poor for what you might expect from investing over a long period. As kidmugsy says above, if instead of calculating expected value you instead compare to the cost of annuitisation, the performance looks much better - but that reflects the poor value of indexed annuities rather than the stellar performance of Added Pension. However, if what you want is more guaranteed income in retirement, it demonstrates that Added Pension will be very competitive.

Whilst there is no investment risk, there is increased political/policy change risk, as demonstrated a few years back by the change from RPI uprating to CPI uprating. Being a fairly low pension reduces the risk somewhat though, as you should be comfortably below any future caps that mght be dreamed up (not to suggest this is likely, but all possible outcomes should be considered). I wouldn't place much weight on this, but if the decision was close, I would prefer to avoid having all my eggs in a basket dependening on future Government whims and prefer to purchase real investments.

In summary, Added Pension is a good investment to deliver a guaranteed pension income. Whilst it is good, it is not amazing value and it is right to consider alternatives, particularly if looking to fund early retirement or provide luimp sums.

chucknorris · 31 October 2014 at 5:25PM

mjfp509 wrote: »

I have been a teacher for just over 20 years now and have just over 18 years pension service due to a couple of breaks. By next July, according their pension calculator, I would get approx £8500 per year at retirement.

Due to the very stressful nature of the profession nowadays, I have been considering taking a different career path.

Because of this, I have been thinking a lot about boosting my pension. I have looked into SIPPs and was all set to go, but then I stumbled upon buying Additional Pension Benefits (APB) for teachers.

For example, to buy £2000 of addition pension would cost approx £26,500 for my age. I can claim 20% of this back in tax relief, so would have to pay net approx £21,200. This is index linked to inflation rises.

Before I commit to this, can anyone advise whether I'd be better using my savings into something else which is better?

To me, this seems the best, risk-free solution?

It is subjective, but I bought the max allowed additional pension because I thought that it is better value than a SIPP. I also have been investing the rest of my salary into a SIPP, but I think that the additional pension was a better deal, I like the certainty of knowing what you are getting. I originally purchased £5,600 (at the time this was the max allowed) and I bought an additional £250 this summer. I did apply to buy £500, but they said that with CPI applied to the original £5,600 it would have taken me over the current max allowed of £6,200.

Buying Additional Pension For Teachers: Good idea?

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