Teachers' Pension Scheme

whitesatin

A friend of mine has already done more than 40 years teaching and contributed to the scheme. She continues to work and is still paying contributions even though she could have taken her full pension two years ago.

I didn't think you could pay in more than 40 years contributions but she definitely still pays them thinking that it is worth it because her pension, when she takes it, will be based on her last few years of salary which is increasing due to pay rises.

Can anyone clarify this for me please?

Andy_L

The TPS has a maximum of 45 years service

https://www.teacherspensions.co.uk/members/the-scheme/active-teacher/your-salary-and-service.aspx

Backbiter

Yes, but given her age, she will be in the 80ths scheme, which means that after 40 years of contributions, she will have achieved the maximum 40/ 80ths pension, which is half of your final salary for those who joined the scheme before it was changed to a 60ths scheme. (That was around a decade ago I think. That scheme allows you to put in 45/60ths, so you get a higher proportion at the end, but it is now a career-average not final-salary scheme, and there is no lump sum on retirement as in the old scheme. Oh, and you now have to work until 68 to get your pension).
It is very unusual for anyone to actually make the 40 years of contributions, as most teachers don't start until they're aged 22, and most are clapped out and on their knees aged 60 and therefore retire on less than half their final salary. I think the percentage who do make the 40 years of contributions is under 5%, although the Government, when calculating the liabilities of the scheme, assumes all teachers take the maximum pension, which is totally untrue, but there you go.

Has your friend taken any career breaks, for maternity leave etc.? If so, then she may well have been teaching for 40 years in total but might not have made 40 years of contributions, in which case it would make sense to be still contributing.

But if she has made the full 40 years of contributions she should stop paying them.

Just for interest to non-teachers, they currently pay in 9.6% of their salary, with an employers' contribution of 16.4%
https://www.teacherspensions.co.uk/news/employers/2014/03/teachers-pension-scheme-tps-actuarial-valuation.aspx.
With an average teacher salary of £29k (http://www.payscale.com/research/UK/Job=High_School_Teacher/Salary), this means £7.5k pa is going towards their pension. With a teaching career now 46 years, they will accrue a pension pot of £345k before growth.
With growth of 3% a year, this would give a (theoretical) pot on retirement of £1.4million (4% growth would yield £2.1m), which would be sufficient to yield an annual pension (aged 68) of some £84k, or three times the current average teacher salary. (at 4% growth, they could have an annual pension of £132k).
[All this is at today's values, with no account taken of inflation. In reality, teachers' salaries and the value of their contributions will increase significantly over a 46 year period, so the final pot would be far in excess of £1.4million and would yield far more than £84k in annual pension, so I have left inflation out of the calculations].
http://www.ft.com/personal-finance/annuity-table
In reality, after 46 years, they will get around 2/3 of their career average, or some £20k a year. A lot less than the £86k (or £132k) p.a. the (theoretical) fund would yield.
In reality, of course, teachers' contributions are not invested, and go to pay the pensions of those in retirement.

whitesatin

Yes, she is pretty unusual but loves her job so much she wants to carry on as long as she can. She does an excellent job too. She would have, like myself, been in the old scheme and has had more than 40 years unbroken service.

SeekTruth

Backbiter wrote: »

...
Just for interest to non-teachers, they currently pay in 9.6% of their salary, with an employers' contribution of 16.4%
https://www.teacherspensions.co.uk/news/employers/2014/03/teachers-pension-scheme-tps-actuarial-valuation.aspx.
With an average teacher salary of £29k (http://www.payscale.com/research/UK/Job=High_School_Teacher/Salary), this means £7.5k pa is going towards their pension. With a teaching career now 46 years, they will accrue a pension pot of £345k before growth.
With growth of 3% a year, this would give a (theoretical) pot on retirement of £1.4million (4% growth would yield £2.1m), which would be sufficient to yield an annual pension (aged 68) of some £84k, or three times the current average teacher salary. (at 4% growth, they could have an annual pension of £132k).
[All this is at today's values, with no account taken of inflation. In reality, teachers' salaries and the value of their contributions will increase significantly over a 46 year period, so the final pot would be far in excess of £1.4million and would yield far more than £84k in annual pension, so I have left inflation out of the calculations].
http://www.ft.com/personal-finance/annuity-table
In reality, after 46 years, they will get around 2/3 of their career average, or some £20k a year. A lot less than the £86k (or £132k) p.a. the (theoretical) fund would yield.
In reality, of course, teachers' contributions are not invested, and go to pay the pensions of those in retirement.

If you invest £345k at a compounded interest rate of 3% for 46 years then you end up with £1.3 million. However, if you invest that £345k in equal monthly instalments over 46 years then the result is more like £734k. At current annuity rates for a married 68 year old female with a 68 year old husband the £734k would buy an annuity linked to inflation (admittedly RPI rather than CPI) of about £24k pa with 50% spouse's pension.

PeacefulWaters

will be based on her last few years of salary which is increasing due to pay rises

Won't the pay rises be below the indexed rises a pensioner would get?

whitesatin

PeacefulWaters wrote: »

Won't the pay rises be below the indexed rises a pensioner would get?

I know what you are saying but I think, at a certain management level, you tend to get awards that are higher than those ordinary teachers get. I think they are awarded on performance. I can't be sure of this though.

Backbiter

SeekTruth wrote: »

If you invest £345k at a compounded interest rate of 3% for 46 years then you end up with £1.3 million. However, if you invest that £345k in equal monthly instalments over 46 years then the result is more like £734k. At current annuity rates for a married 68 year old female with a 68 year old husband the £734k would buy an annuity linked to inflation (admittedly RPI rather than CPI) of about £24k pa with 50% spouse's pension.

My error. You are right. The online calculator I used wasn't clever enough to work out the figure accumulated monthly over 46 years

kidmugsy

Backbiter wrote: »

Just for interest to non-teachers, they currently pay in 9.6% of their salary, with an employers' contribution of 16.4% p.a

The employers' contribution is in one sense a fiction, of course, since (i) it is the benefits that are defined, not the contributions, and (ii) as you say, there is no fund anyway.

chucknorris

Backbiter wrote: »

Just for interest to non-teachers, they currently pay in 9.6% of their salary, with an employers' contribution of 16.4%
https://www.teacherspensions.co.uk/news/employers/2014/03/teachers-pension-scheme-tps-actuarial-valuation.aspx.

That 9.6% is an average rate, the actual rate varies from 6.4% to 12%, my contribution rate is 11% (it was only 6.4% a few years ago). There will be a further review of the contribution rates that will apply from April 2015, although this may have a minimal impact, since one of the objectives of that review is to ensure that the average contribution is 9.6% (which has already been achieved):


https://www.teacherspensions.co.uk/members/the-scheme/active-teacher/how-much-do-i-pay-in.aspx

jem16

Backbiter wrote: »

Yes, but given her age, she will be in the 80ths scheme, which means that after 40 years of contributions, she will have achieved the maximum 40/ 80ths pension, which is half of your final salary for those who joined the scheme before it was changed to a 60ths scheme.

That's not true. The maximum allowed for the 1/80ths scheme is 45 years just like the 1/60ths scheme. So you could have 45/80ths.

(That was around a decade ago I think.

It changed in 2007.

That scheme allows you to put in 45/60ths, so you get a higher proportion at the end,

It's no different to the previous scheme. The only difference is the retiral age and no automatic lump sum. It is still a final salary scheme.

but it is now a career-average not final-salary scheme, and there is no lump sum on retirement as in the old scheme. Oh, and you now have to work until 68 to get your pension).

It's not a CARE scheme yet and won't be until April 2015. Retirement age is based on state pension age, not age 68.

In the OP's friend's case she will stay on the final salary scheme as she has protection.

But if she has made the full 40 years of contributions she should stop paying them.

That would be bad advice as 45 is the maximum. If she had already reached her maximum she would have been told to stop paying by the TPS.