Purchase of Additional Teachers Pension

KKB201

Have an opportunity to buy an additional £3K of pension for the lump sum of £34K. If purchased before the new tax year then this will be increased in line with the RPI until the pension is paid at 65 - in just under 19 years time - and then by the CPI. This includes a 50% spouses pension and the usual death benefits. This seems to be a good deal as I recall reading somewhere that to purchase an annuity at age 65 you would need approx £25K for every £1K required.

The other option I am considering is to invest the £34K in a personal pension plan - not a higher rate tax payer and very unlikely to become one - to give the flexibility to draw the pension from age 55 if required.

I would be grateful for your thoughts on the best course of action. The additional pension purchase seems to be the obvious choice and, if my sums are correct, to good an opportunity to miss. However, I keep thinking that I must be missing something obvious!

Thanks

Sobraon

Interesting, I rang up Mowden Hall (TPS HQ) on Monday on this very point and they (after a bit of a conflab) denied twice that there was any plans to change the indexing from RPI to CPI for Additional Pension uprating before payment. Can I ask you for the source of your information please so I can talk to them again?

Loughton_Monkey

KKB201 wrote: »

Have an opportunity to buy an additional £3K of pension for the lump sum of £34K. If purchased before the new tax year then this will be increased in line with the RPI until the pension is paid at 65 - in just under 19 years time - and then by the CPI. This includes a 50% spouses pension and the usual death benefits. This seems to be a good deal as I recall reading somewhere that to purchase an annuity at age 65 you would need approx £25K for every £1K required.

That £25K figure is 'ballpark' correct. So assuming you put £75K into something today, that would grow by RPI, you would have enough to pay for £3K pension (increased by RPI to age 65).

KKB201 wrote: »

The other option I am considering is to invest the £34K in a personal pension plan - not a higher rate tax payer and very unlikely to become one - to give the flexibility to draw the pension from age 55 if required.

Why are you considering this? Do you know somewhere that will give investment growth more than double RPI?

KKB201 wrote: »

I would be grateful for your thoughts on the best course of action. The additional pension purchase seems to be the obvious choice and, if my sums are correct, to good an opportunity to miss. However, I keep thinking that I must be missing something obvious!

Yes. It's 'obvious' you aren't a Maths teacher!

jem16

KKB201 wrote: »

The other option I am considering is to invest the £34K in a personal pension plan - not a higher rate tax payer and very unlikely to become one - to give the flexibility to draw the pension from age 55 if required.

Why use a pension at all? Would S&S ISA be better and give you the flexibility?

You have to consider the overall tax situation in retirement. Would you lose some of the higher personal allowance for over 65s by having too much taxable income from pensions? This could see you being taxed more.

Loughton_Monkey

jem16 wrote: »

Why use a pension at all? Would S&S ISA be better and give you the flexibility?

Because he's paying £34K for something that's clearly 'worth' around £75K!

jem16

Loughton_Monkey wrote: »

Because he's paying £34K for something that's clearly 'worth' around £75K!

Not if taken early at age 55 it wouldn't which was the whole point of the other possibilities.

If it also means the loss of the higher personal allowance it could see a marginal rate of tax of 31%.

KKB201

Sobraon:

Heard rumours of the change from RPI to CPI for other public sector pensions and decided to check. I am in the Scottish Teachers Scheme. I asked the question of the Scottish Public Sector Agency and they confirmed that it was changing. Nothing in writing though!

Loughton Monkey:

Thanks for your input. You're right, I'm not a maths teacher; however, I had worked out that the £34K payment was less than half the ballpark £75K figure that I was using. My concern was that my ballpark figure was a load of tosh!

If I were to opt for the personal pension route then I would benfit from the tax relief and have the option to draw it at 55. These both go some way to balancing the decision. Not being a financial wizard I just don't know how likely it would be for the pension to perform well enough to offset the difference.

jem16

KKB201 wrote: »

Sobraon:

Heard rumours of the change from RPI to CPI for other public sector pensions and decided to check. I am in the Scottish Teachers Scheme. I asked the question of the Scottish Public Sector Agency and they confirmed that it was changing. Nothing in writing though!

Here is the circular from the SPPA website.

http://www.sppa.gov.uk/scot_teachers/documents/STSSTaxAEandRPIcirc4.pdf

If I were to opt for the personal pension route then I would benfit from the tax relief and have the option to draw it at 55. These both go some way to balancing the decision. Not being a financial wizard I just don't know how likely it would be for the pension to perform well enough to offset the difference.

£34k would see a gross contribution of £42,500 paid into a PP. Assuming 5% growth over 19 years ( to age 65) this would see a return of £107,395 or £65,931 over 9 years ( to age 55). The 5% figure is usually considered achievable but obviously not guaranteed.

Is your retiral age 65? I would have expected it to be age 60 unless you joined the scheme late.

Have you worked out how much pension income you will have, including the state pension, at age 65?

KKB201

Jem 16

Thanks very much for the link. I now have a copy of that for my records. Unfortunately 65 it is as I did not join the teaching profession until mid 2007. The local government pension from my previous job combined with my teaching pension (working for another 3 years and including the purchase of £3K) and State pension puts me approx £5K above the personal allowance.

On the figures you quote at 5% the return of £107,395 would give about £4.3K p.a. using my previous ballpark of £25K per £1K purchased. Just need to work out how much that will be worth in 19 years time after inflation. The big attraction at the moment is the increase by RPI if I purchase the additional pension before the end of the month. This seems like the best way forward but I do lose the flexibility of a personal pension and the potential for a better return. What price certainty! I am in the fortunate position that my partners final pension, still final salary, should be nearly double my combined pensions. Consequently, I guess that I can afford to take a bit of a gamble. On scant information which way would you jump?

jem16

KKB201 wrote: »

On scant information which way would you jump?

There is no doubting that if you are prepared to wait until you are 65, then the Additional pension is a very good deal.

Much depends on how much you really want to retire at age 55 and how you would plan to fund it. Would you take the Teacher's pension early and lose 5%pa by doing so? Or would you look to fund the gap from age 55 to age 65 separately and not take the teacher's pension until age 65?

Personally I am glad to be getting out of teaching at age 60 and could not imagine still being there at age 65. However 10 years is a big gap to fund.