Teachers Pension - Take the Lump Sum?

isie1980

Firstly, apologies for the length of this post...

I am trying to help my mum out with her finances and am seeking some advice and/or reassurance that I am on the right track.

1. Mum is 60 this year and currently works full time as a teacher.
2. She is very stressed at work to the point it is making her unwell, and is looking to go part-time (to 60%)
3. She currently has £55k outstanding mortgage which runs for another 5 years (not remotely ideal, but dad didn't pay for years, she didn't know, they subsequently divorced 2 yrs ago and she's been paying the £800 pcm repayments ever since)
4. Her annual income is around £36k
5. State pension estimate from Jan 2013 is £5k pa
6. Her father will most likely pass away within the next 12-24 months and inheritance will remove any financial worries and enable her to retire properly

My current view is that she cannot continue in full time employment if it making her ill. So, my task is to ensure she makes the most of her finances if she goes part-time.

At the moment her pension statement tells me that she can take a basic pension of £6600 pa, with a tax free lump sum of £19k, or she can take an actuarially reduced pension of £5300 pcm, with a lump sum of £35k.

I guess she needs to reduce her mortgage payments as far as possible which means sacrificing the higher monthly pension for a higher lump sum. I've asked her to do an outgoings statement so that I can identify how much will be left for mortgage each month and work backwards to determine how much lump sum she should take - my thinking is that we need this to be as low as possible bearing in mind the longer term benefits of a higher annual income from pension.

I guess I'm looking for people to offer assistance and advice. Mum is too overwhelmed and tearful etc to really look at this herself, so I asked her to consider that giving me the paperwork is handing over the stress, so it's one less thing to worry about. Of course, I now need to ensure I do what is right by her.

I think I've provided enough info, but do ask if there are any other key pieces that are needed to provide guidance.

Thanks in advance!

Isie

DVardysShadow

As you are doing paper exercises, you could consider comparing your best scenario to someone in an identical situation who sees that within 24 months they get an inheritance plus the State pension and therefore grits their teeth to do the bare minimum to stay employed, turning up to work each day and going long term sick as necessary, defaulting on the mortgage to a point short of repo and pulling every trick they can. Your mother is probably too conscientious to go down this road.

As it is, it looks to me like the problem is covering a 2 year gap by hook or by crook with the minimum impact on her long term position.

I guess she needs to reduce her mortgage payments as far as possible which means sacrificing the higher monthly pension for a higher lump sum. I've asked her to do an outgoings statement so that I can identify how much will be left for mortgage each month and work backwards to determine how much lump sum she should take - my thinking is that we need this to be as low as possible bearing in mind the longer term benefits of a higher annual income from pension.

Although you are taking a sensible approach in doing the projections, I think for a 2 year gap, it is far too drastic to try and reduce the mortgage to make the repayments fit the income - at least as the first measure. As you have identified, this could have ramifications for decades.

Try and look for ways to cover the gap - credit cards for everyday expenditure over the gap may help. making reduced mortgage payments [without agreement if necessary] and similar measures may all help preserve the pension.

Prudent

I think teaching will only get tougher in the next couple of years with all the cutbacks.

I am not sure you mum will be able to take her pension and continue working part time. I teach in Scotland and as far as I know you have to retire and resign your post to take your pension. Some tecahers then sign up to the supply list and can work a limited number of days each year. This doesn't seem to apply to other final salary schemes. My OH works for Royal Mail and will soon be able to take his pension and continue working full or part time if he wishes.

dimbo61

Dont forget the bigger lump sum will mean a smaller pension for the rest of her life !!! and she should enjoy a long retirement.
She needs to check if she would be employed part time by her school or have to goto an agency

isie1980

I guess the information I omitted is that mum's employer has stated she can hand in her notice now to cease employment end August, and be re-employed on a 60% contract from September academic year.

Re DVardysShadow - you're right she is too conscientious to take the 'by hook or by crook' route - I couldn't even get her to ring in and take 2 weeks sick over the easter break despite the fact she's not letting down any students as they're not there! She is not financially savvy but would baulk at any suggestions which involve none-mortgage type debt.

One possible option I've considered is a long-term (say 10 years) loan to help make up the deficit to continue repaying the mortgage without taking the bigger lump sum. I guess another option would be to switch the remaining £55k mortgage to interest only for the next 5 years on basis inheritance will sort this out. But is it sensible or even morally acceptable to count on the demise of a relative (even though they are 83 and have cancer)?

hcb42

personally I would take the bigger lump sum, that in itself would generate some interest even with the mediocre interest rates we have now. It would take well over 15 years (based on v simple interest calc) for her to be worse off and if savings rates improve over that time, it will all help.

getting a loan to pay the mortgage doesn't seem a smart idea.

kate2954

If you reduce your hours in the last ten years of your teaching career , it does not affect your final average salary as this is calculated on the "best 3 years " salary over the previous 10 years . I am changing to a 0.6 contract in September as teaching is getting harder and Im only in my thirties and would advise your mum to do the same. She needs to contact her union ASAP - you could contact by e mail on her behalf if you prefer and ask for advice on working conditions and retirment benefits . There is also lots of information on the NUT website . Good luck !

isie1980

kate2954 wrote: »

If you reduce your hours in the last ten years of your teaching career , it does not affect your final average salary as this is calculated on the "best 3 years " salary over the previous 10 years . I am changing to a 0.6 contract in September as teaching is getting harder and Im only in my thirties and would advise your mum to do the same. She needs to contact her union ASAP - you could contact by e mail on her behalf if you prefer and ask for advice on working conditions and retirment benefits . There is also lots of information on the NUT website . Good luck !

Kate, it hadn't actually occurred to me to contact the union. Also, whilst I am not pleased to hear you feel in a similar situation, I think my mum would feel reassured that she isn't alone. She says she feels like a failure, and she is so busy she is missing/forgetting things - it doesn't seem to matter that I tell her most 60 year olds are no longer trying to maintain a 'career' as such, or that I feel the employers are simply trying to get as much as they can for as little as they can with the cuts, and that inevitably not everything can get done to the same standards as they were with more workforce. It is awful that people are made to feel this way, and I think the 0.6 contract is the sanest way forward whilst maintaining a reasonable income.

Thanks

magpiecottage

Do bear in mind that if she takes the cash, she is unlikely to achieve a return equal to the effective rate provided by the scheme (even allowing for any extra tax).

Does she not also get full pension at 60 (assuming her service is reasonably long standing).

Also, you do not say what she teaches. There seems to be great demand for tutors in some subjects. It is all one to one and generally the pupil wants to learn so the stress levels plummet!

kate2954

I would also ring the Teachers Pension Scheme for accurate pension calculations too- they are really helpful. The calculations sound low or did she enter the profession later in life or take a long break at some point ? The unions have draft letters available and will make an application on her behalf for reduced hours if need be. If she reduces her hours to 2 days, pay will be approximately 15000,18000 for 2.5 and 22000 for 3 days. She may get working tax credit and council tax help if she does the 2 days. Another option is take pension and go on supply. Less stressful in terms of workload and responsibility but more risky in terms of available work and most schools use agencies so pay £80 per day. Any chance of remortgaging to reduce monthly payments? I have been teaching for 16 years and the workload/stress has increased significantly so she needs to put her health and well being first. Sounds like she is suffering from stress/depression and needs help and to take her 6 months paid sick leave but I bet she wont !