Teachers Pension Scheme - Additional Contributions

Cardew

I wonder if any of the pension gurus on here can offer advice on the following please.

A friend’s daughter – aged 45 – is a teacher with a salary of £32k who contributes to the teacher pension scheme. She has been employed as a teacher for 12 years, and before that spent 10 years with a major UK company and will get a pension for that employment when aged 60.

She has received an inheritance of £20k and wishes to invest that sum in a pension with any ‘tax breaks’ to which she would be entitled,

Is it possible to do this in the teacher’s scheme either ‘drip fed’ or as a lump sum? If drip fed(AVC?) what is the maximum annual contribution to gain tax/NI relief?

Or any other suggestions please?

jem16

Cardew wrote: »

Is it possible to do this in the teacher’s scheme either ‘drip fed’ or as a lump sum?

She would have 2 options - Additional Pension or AVCs.

Additional Pension buys her a guaranteed amount and is just like her normal TPS pension. It's index-linked from the moment it's bought. This can be purchased either as a lump sum or in monthly instalments. There is a calculator on the TPS website which would tell her how much she would get for £20k lump sum.

AVCs are generally monthly payments - not sure if you could do a lump sum. There is no great advantage to using TPS AVCs and she would probably be better using a PP/SIPP for greater flexibility and choice of investments.

More info on both here;

https://www.teacherspensions.co.uk/members/the-scheme/active-teacher/pay-more-to-get-more.aspx

If drip fed(AVC?) what is the maximum annual contribution to gain tax/NI relief?

With either method she would gain tax relief on £32k as it's 100% of relevant earnings. There is no NI saving.

Cardew

Can you explain the last sentence please.

atush

Does the woman in question want to

A retire before her TPS scheme age?

B- have any debt

C have an emergency pot of savings and invesments?

I would suggest a personal pension for some of the money (as this can be taken from age 55 and will mean she could retire early w/o reducing her TPS pensio) and how much would depend on the answers to the above.

Cardew

There is some confusion on the finishing date of her TPS. Her Normal Pension Age on her last statement was stated as 60 years; but she thinks that with the new scheme it will be 67 which will be the same as qualification for her Retirement pension???


No debts and well-off parents would provide emergency cover.


A private pension plan with the ability now to draw 25% cash(without paying tax) at age 55 would appeal. However the income from a 10 year old £20k fund would hardly enable early retirement!


I should have added the lady is single with no dependants.

jem16

Cardew wrote: »

Can you explain the last sentence please.

With the TPS the pension contributions come from gross salary so they reduce taxable pay and thus tax relief is automatic. However if you were to pay a lump sum then you would need to apply to HMRC for the tax relief as there is no mechanism to apply basic rate tax relief for lump sums.

As to NI saving there will be none as the TPS is not a salary sacrifice scheme. NI is always applied to the gross earnings - ie in this case £32k. It doesn't matter how much of a pension contribution is made, NI will still be the same.

atush

I would say for a start, 20K into a pension will become 25K with tax releif and then ther is the miracle of compounding investment returns/interest

http://monevator.com/investing-for-beginners-compound-interest/

So she could retire a year or more early w/o getting her pension early reduced. It all depends on her spending needs in retirement.

jem16

Cardew wrote: »

There is some confusion on the finishing date of her TPS. Her Normal Pension Age on her last statement was stated as 60 years; but she thinks that with the new scheme it will be 67 which will be the same as qualification for her Retirement pension???

From April 2105, the TPS moves to a Career Average scheme with a Retirement date the same as the state pension age. All previously accrued benefits will have an age 60 or age 65 retirement age - in your friend's daughter's case that sounds like it is age 60. Unfortunately as she is only age 45 she will not have any protection and will move to the new scheme in April 2015.

A private pension plan with the ability now to draw 25% cash(without paying tax) at age 55 would appeal. However the income from a 10 year old £20k fund would hardly enable early retirement!

That £20k will grow over the next 10 years - hopefully. However if she is really interested in retiring earlier she can contribute more, not just the £20k.

She can take her current 12 years at age 60 though.

Cardew

jem16 wrote: »

She can take her current 12 years at age 60 though.

Thanks for the above post.


We were a little bit at cross-purposes about 'retiring early' - obvious £20k invested with the initial tax refund added and(hopefully) massive returns and(hopefully) miniscule charges! it might enable retirement a couple of years earlier.


Slightly off subject, but is there an idiot's guide for those transferring to the new TPS.


Her current Annual basic pension based on a NPA age 60 is just under £5k. What will be the position in 15 years time at age 60.

jem16

Cardew wrote: »

Slightly off subject, but is there an idiot's guide for those transferring to the new TPS.

https://www.teacherspensions.co.uk/reform/members/reform-member-hub.aspx

Her current Annual basic pension based on a NPA age 60 is just under £5k. What will be the position in 15 years time at age 60.

That will depend on her salary in 15 years time. Basically it will be 12/80ths of her salary which is where they are getting the £5k approximately from.

£32k/80 = £400p times 12 years = £4800pa. That would also give a lump sum of £14,400.

By the way a lump sum payment of £20,220 would allow her to buy £1500pa of Additional Pension payable from age 60. This would be index-linked from now so would be worth more at age 60. With CPI at 2.5% it would be £2172.

dunroving

jem16 wrote: »

She would have 2 options - Additional Pension or AVCs.

Additional Pension buys her a guaranteed amount and is just like her normal TPS pension. It's index-linked from the moment it's bought. This can be purchased either as a lump sum or in monthly instalments. There is a calculator on the TPS website which would tell her how much she would get for £20k lump sum.

AVCs are generally monthly payments - not sure if you could do a lump sum. There is no great advantage to using TPS AVCs and she would probably be better using a PP/SIPP for greater flexibility and choice of investments.

More info on both here;

<<< link removed because as a new poster I am not allowed to include links>>>


With either method she would gain tax relief on £32k as it's 100% of relevant earnings. There is no NI saving.

I just wanted to pick up on this point. I am not in TPS (I used to be but withdrew my contributions foolishly back in the 1980s). However, I am in the USS (university equivalent) and there are advantages to paying AVCs in the USS system that, if also applicable to the TPS, wold be worth thinking of.

First is that the USS AVC scheme (run through Prudential) is directly linked to the final salary scheme in a way that at retirement it is simpler to calculate the total pension pot in order to draw a 25% tax-free lump. It is not as straightforward to do this if cash is paid into a SIPP. My plan (if my calculations are correct!) is to reverse-commute the lump sum in my USS final-salary scheme into added years pension and take 100% of my Prudential AVCs as tax-free cash.

Second is that, again because the two schemes are linked, money in the Prudential AVCs can be used at retirement to buy additional defined-benefit pension (final salary pension).

I agree with your point regarding greater flexibility and choice of funds in a SIPP, but the above "flexibility" may outweigh this.

[It may well be that TPS scheme doesn't work this way but it's worth the OP looking into]