Teachers' Additional Pension or AVCs

NLA_2

Hi all

I am a 40 year old teacher with a pre-2007 pension and am looking to increase my pension for when I'm 65. A bit of financial advice would be gratefully received!

I've looked at previous posts and am currently weighing up two options:

1. The TPS Additional Pension Benefits - I have looked at putting in £1710 per month (yes it's a lot! for one year) which would buy me £2000 per year from age 65. As I understand it, the £1710 would be partly made up by my tax allowance (normal rate taxpayer) and the nominal £2000 I would receive would actually be greater when I'm 65 as it would rise with inflation from now until I retire and also after I retire.

For the £2000 benefit from a one-off lump sum payment it would cost me a lump sum of £20000.

For the same benefit I would have to pay £136 per month until I was 60.

2. Alternatively I could go for AVCs and they appear to have different rates of return and I'm still getting my head around the annuity thing.

Could MSE wise-heads give me their thoughts on which is the best option?

Many thanks.

dunstonh

A bit of financial advice would be gratefully received!

The board or posters are not authorised to give financial advice. Its just comment and discussion. It is impossible to give advice on a forum.

Could MSE wise-heads give me their thoughts on which is the best option?

Why are you only limiting yourself to those two options? There are others. Like utilising spouse pension allowances or using a stocks & shares ISA or a personal pension.

2. Alternatively I could go for AVCs and they appear to have different rates of return and I'm still getting my head around the annuity thing.

They dont have rates of return. They are subject to investment returns which are unknown. The potential will depend on the level of risk you take and where and how you invest it.

TPS is guaranteed but has tie ins to the main scheme and limitations on the maturity process. Individual pensions give you more flexibility but you are likely to need a decent return to be able to beat the TPS. Certainly beating it is within potential of most balanced portfolios but you wont know until you get to retirement which option is best.

NLA_2

Hi.

Thanks for the prompt reply. I take your point on the advice and will happily take any comment or discussion available.

I'm limiting myself to those two option for ease of response more than anything else. I have little idea of the kind of return I could get on a Personal Pension but it's certainly an option if it beats the other two. I wonder what others would do if they were my age and could invest £20,000 over the next year into a pension (with the associated tax benefits) which was index-linked and gave 50% to a partner or spouse at death. I guess I'm a medium-risk kind of guy and would it be fair to assume 6% growth but 3% inflation?

Thanks.

NLA_2

Hi everyone - anyone else with any thoughts on my dilemma on pension?

jem16

NLA wrote: »

Hi everyone - anyone else with any thoughts on my dilemma on pension?

Almost 2 years and you haven't got any further forward?

Have you thought of when you want to retire? With the proposed changes to the TPS part of your pension will be available from age 60 with the other part from age 67. if you choose to retire before 67, some of your pension will suffer an actuarial reduction.

Do you know how this will affect Additional Pension?

I would ignore AVCs as they are practically obsolete now unless the scheme allows you to take your lump sum from the AVC pot which the TPS does not allow. You would be better off with a Personal Pension of your own choice.

However as a basic rate taxpayer, the pension doesn't give you much advantage as you will get 20% tax relief now but pay 20% tax in retirement. If you were going down the pension route, the Additional Pension is at least guaranteed if that's what you would feel most comfortable with.

The other option is a S&S ISA which might give you more flexibility if you wish to retire earlier than age 67 as it could make up the shortfall of the actuarial reduction on your TPS.

NLA_2

Ha - yes - 2 years on and I'm still at the thinking stage. I'm struggling with the advantages of buying into the Teachers Additional Pension versus doing the same thing into a private scheme - it doesn't seem obvious to me which is best. Assuming I have £20,000, I'm 44 (retiring at say, 65), I want inflation-protection and cover for my wife, is there an obvious calculation I should be doing?

jem16

NLA wrote: »

I want inflation-protection and cover for my wife,

Does your wife have her own pension?

is there an obvious calculation I should be doing?

Not really. It's down to what you want to do - risk free with Additional pension or other options that involve risk but might be a better choice.

chucknorris

NLA wrote: »

Ha - yes - 2 years on and I'm still at the thinking stage. I'm struggling with the advantages of buying into the Teachers Additional Pension versus doing the same thing into a private scheme - it doesn't seem obvious to me which is best. Assuming I have £20,000, I'm 44 (retiring at say, 65), I want inflation-protection and cover for my wife, is there an obvious calculation I should be doing?

This is my take on it:

Last year I bought the £5,600 max additional teachers' pension allowed (it has since been increased to £5,900), over 3 years, which costs me £2,130.24 a month. I think the additional pension purchase is good value. Of course no one can say for sure how the alternative would perform, but what I like is the certainty of the additional pension purchase.

It increases in line with inflation so you can compare the investment right now. If I paid into the alternative AVC scheme at the same rate and bought an inflation linked annuity at 65 with the £76,689k that I am investing it would only buy me about £3,344.41 compared to the £5,600 that I have been able to buy. Of course that would be ignoring any growth from the mid point of buying my additional contributions to retirement in 9.5 years (aged 65). The difference is £2,25.59 which I have calculated the AVC would have to average a return of 5.6% PA to equal the teacher’s additional pension, which it might well do, but as I said above I appreciate the certainty and I do think that a guaranteed 5.6% per annum is good value (especially in the current economic climate) and I am content to settle for it. The calculation also assumes no change in the annuity rates (which could of course improve, or even drop further) and also that enhanced annuity rates are not applicable.

EDIT: By the way I emphasise the point that I am no expert on pensions so the above is only my opinion, you need to work out what represents value for you.

NLA_2

Thanks for everyone's comments and thanks 'ChuckNorris' for your thoughts and calculations - what you have come up with was what I was thinking was probably the case and I'm grateful to you for taking the time.

Unless of course we've both missed something and some wise person can shed any further light on the issue ....?

NLA_2

jem16 wrote: »

Does your wife have her own pension?

Yes she does but I want to make sure that any benefits can be passed on to her as and when ...

jem16

NLA wrote: »

Unless of course we've both missed something and some wise person can shed any further light on the issue ....?

I don't think either of you has missed anything. It is a good deal but could be bettered but no guarantee. If you want secure income with no risk then the AP gives that.

I would check though what is likely to happen with the proposed changes to career average scheme though.

NLA wrote: »

Yes she does but I want to make sure that any benefits can be passed on to her as and when ...

Seems sensible. I was only asking in case she had no pension provision and all was to be in your name which wasn't good for tax related reasons.