Teachers pension question

tabbiecatz

Hello,

This question comes from a close family member who is a little confused about what to do with their lump-sum. Forgive me if I miss some details, it's a little sketchy but please ask and I will find out if you have a question.

A long time ago this person had been paying into a private pension, then started teaching and got a teachers pension set up. They took the private pension and rolled into the teachers pension (apparently). This may be why the £60,000 lump sum is so large, below?

Here are the facts that I am aware of:

- Received a lump sum of £60,000 from their pension. This is now in a deposit account of some kind.

- SPA (Scottish Pension Agency) is paying them £700 per month as pension, which they top up using savings when necessary.

- Savings of £30,000 in cash ISA locked in for 4 years at around 4%.

- No state pension for until Feb 2014.

- No mortgage, very little outgoings of £300 per month.

I'm not really in the know about teachers pensions in Scotland. Given they are currently getting £700 per month from the pension, doesn't that mean they must have bought an annuity?

What should this person do with the lump-sum they received? I'm guessing they were offered the lump sum and took it, when perhaps they should not have. What do people normally do with a lump sum of that amount?

Any advice welcomed!

jem16

tabbiecatz wrote: »

A long time ago this person had been paying into a private pension, then started teaching and got a teachers pension set up. They took the private pension and rolled into the teachers pension (apparently). This may be why the £60,000 lump sum is so large, below?

No it won't have anything to do with that. Transferring a private pension into the teachers' scheme will have bought a number of years in the final salary scheme.

As it's a long time ago, it will be under the original scheme rules where there is an automatic lump sum of 3 times the pension. As it's obviously way more than that, your family member must have chosen to commute some of the pension to take a higher lump sum. To be honest this is probably not a good choice given the dire commutation rate of 12:1.

Received a lump sum of £60,000 from their pension. This is now in a deposit account of some kind.

Unfortunately earning way less in interest than what the commutated pension would have given.

I'm not really in the know about teachers pensions in Scotland. Given they are currently getting £700 per month from the pension, doesn't that mean they must have bought an annuity?

No the teachers' pension scheme is a final salary pension. It pays a monthly income.

What should this person do with the lump-sum they received? I'm guessing they were offered the lump sum and took it, when perhaps they should not have. What do people normally do with a lump sum of that amount?

Any advice welcomed!

It would have been better just to take the automatic lump sum and the higher pension unless there was a specific reason to take the higher lump sum. There doesn't appear to be though. Now all can be done is save it, invest it or spend it.

jamesd

If they are still working they could recycle £15,000 of the pension lump sum into a personal pension. They could add more money over time. Don't go over £15,000 within the next three years because there are HMRC rules that limit how much lump sum can be recycled. Can do more recycling of it after that time has expired.

They could put the lump sum into a stocks and shares ISA and invest it there to increase in value or pay more tax free income. This is one of the best things to do, just after the pension option. It'll take a few years to do it for all of the lump sum.

Assuming their health is good, it's likely to be profitable for a man to defer taking the state pension for one to three years and a woman for two to five years. The state pension goes up by 10.4% for each year of deferral. Using some of the money to top up income while deferring would be a good use if that top up is needed.

It's usually not a good idea to take lump sums from the public sector pensions, though asking here first is good because there are exceptions when there's a need for the money for something other than things like clearing a mortgage.

dunstonh

Any advice welcomed!

The advice should have been sought before commencing the pension.

What should this person do with the lump-sum they received? I'm guessing they were offered the lump sum and took it, when perhaps they should not have. What do people normally do with a lump sum of that amount?

In most cases, you expect best advice to be not to take all of it as the income benefit and breakeven point is typically very low. There are exceptions but they largely depend on things like health, tax and personal finances.

pmcx9

A very basic point has been ignored here and they did right to take the lump sum. The government is currently and will in the future massively erode the value of public sector pensions. You earnt it, take what you can while you can.

dunstonh

A very basic point has been ignored here and they did right to take the lump sum.

Please explain how taking the lump sum on the defined benefit scheme was the right thing to do?

The government is currently and will in the future massively erode the value of public sector pensions. You earnt it, take what you can while you can.

Why don't you learn about the proposals and changes before typing out misinformation on the forum? Sadly, some poor sole my think you are right and wreck their finances because of it.

dzug1

pmcx9 wrote: »

A very basic point has been ignored here and they did right to take the lump sum. The government is currently and will in the future massively erode the value of public sector pensions. You earnt it, take what you can while you can.

Umm no, or not necessarily

They have not (yet anyway) reduced pensions already in payment.

And the changes do not apply to accumulated pension at whatever date the scheme changes - only to future service entitlements

gadgetmind

pmcx9 wrote: »

The government is currently and will in the future massively erode the value of public sector pensions.

Phew, that's a relief! My big fear was that they were going to leave them unsustainably high and get the country into a right mess.

Thanks for putting my mind at ease.

jem16

pmcx9 wrote: »

A very basic point has been ignored here and they did right to take the lump sum.

With a dire commutation rate of 12:1 it is very unlikely, if not almsot impossible, that I will take the highest lump sum option when I take my Teachers' pension in 3 years time.