teachers pensions - additional pension benefit

chucknorris

jem16 wrote: »

Given the amount of lump sum he's quoting, he's about 30 - assuming age 60 retiral.

TPS is also 65 for anyone who joined after 2008.

This is why I think that it is a good deal (for me) I'm 57 so average 55.5 when I bought the additional pension. Not only that, but I have a lot invested in property and will also have quite a bit in shares by the time I reach 65, so I think it adds some diversity to my portfolio.


But if I was under 40 years old I can see hugheskevi's point, that's an awful long time to accept growth at only CPI level.

ExMugPunter

Just to add an extra dimension to this...

Going forwards there is also the 'Faster Accrual' flexibility. Where you can pay extra to effectively 'buy' a better rate of accrual.

According to the literature this will then be treated exactly as your main pension ie up rated by cpi +1.6% - which is different (better?) than Additional Pension.

However, you might want a bit for this as when I asked them for an estimate or forecast as to how much this would cost me, they said they didn't know as the details have been worked out yet!! This things starts in April!!

I was told I need to apply for it and then I can cancel it if I think it costs too much.

How on earth can they accept or encourage people to sign up for it, when the cost (and the finer details) haven't even been worked out!

chucknorris

ExMugPunter wrote: »

Just to add an extra dimension to this...

Going forwards there is also the 'Faster Accrual' flexibility. Where you can pay extra to effectively 'buy' a better rate of accrual.

According to the literature this will then be treated exactly as your main pension ie up rated by cpi +1.6% - which is different (better?) than Additional Pension.

However, you might want a bit for this as when I asked them for an estimate or forecast as to how much this would cost me, they said they didn't know as the details have been worked out yet!! This things starts in April!!

I was told I need to apply for it and then I can cancel it if I think it costs too much.

How on earth can they accept or encourage people to sign up for it, when the cost (and the finer details) haven't even been worked out!

Unfortunately this is also treated as additional purchase, by that I mean that you can't both buy a higher accrual rate and also buy the max additional pension. I haven't actually compared the two to see if their is a value differential, because I don't think I will still be working when I am scheduled to join the new scheme (but you never know).

ExMugPunter

I know you have high regards for the AP and from reading your posts, I must admit the security of buying a definite level of benefit is beginning to appeal to me.

I am just trying to decide whether I should set up something now (either AP of FA) or pay the extra into my ISA with a view to buying AP with a lump sum once things have settled down.

The way I am beginning to see it is that a 3 pronged attack would suite me well, especially as a late entrant into teaching.
1-The main pension accrued as normal
2- AP or FA to make up the years I was not a teacher
3 - Also continue with my Personal Pension for the extra flexibility / lump sums etc.

Decisions, decisions....

Anomaly100

Right I think I need to read up on pensions because a lot of that went straight over my head. Is there an idiots guide to pensions some where?

I'm nearly 37 so still 30 years until retirement :eek: It makes me a transition member.

Reading some of the guidance on the change from old scheme to new has confused me this paragraph in particular.

If you’re a transition member like Dianne and are already purchasing additional pension in final salary, you’ll also be able to purchase additional pension when you are in career average. The additional pension you purchase in career average is subject to an overall flexibilities maximum of £6,500, but this isn’t affected by any additional pension you are purchasing in final salary (which has an overall limit of £6,300 from 1 April 2015).
Additional pension will be re-valued by figures provided by HM Treasury. It will not attract the in-service indexation that main career average or faster accrual benefits receive.

So does that mean I can elect now to purchase additional pension for my final salary scheme and then buy further additional pension for the career average scheme?

Please can anyone explain the implications for the last two sentences?

Would really appreciate the help.

hugheskevi

According to the literature this will then be treated exactly as your main pension ie up rated by cpi +1.6% - which is different (better?) than Additional Pension.

However, you might want a bit for this as when I asked them for an estimate or forecast as to how much this would cost me, they said they didn't know as the details have been worked out yet!!

There are a few things that can be inferred, although without knowing the key detail of the price not much can be said.

Added Pension has the same value whether a member remains in employment or leaves. Faster Accrual is more valuable the longer a member remains. So if a member knows they are committed to staying in the scheme they may be more tempted toward Faster Accrual (assuming it is priced so as to be cost neutral to the scheme, ie, makes assumptions about how long members will remain in employment, and that the assumption is lower than Normal Pension Age).

On the other hand, teachers who leave the scheme will suffer lower revaluation of their main pension. Increasing the amount of pension with larger in-service revaluation increases this risk. From a simple diversification perspective that suggests Added Pension may be preferred unless there is adverse selection issues (ie member knows they have high probability of staying in scheme a long time) [again assuming pricing is cost neutral].

Please can anyone explain the implications for the last two sentences?

Additional pension will be re-valued by figures provided by HM Treasury. It will not attract the in-service indexation that main career average or faster accrual benefits receive.

Added Pension will increase in line with prices, as set by HM Treasury. Faster Accrual buys more main scheme pension, which increases in line with prices +1.6%.

Without knowing the process though it can't be said which is preferable. There may also be a slight other consideration that the prices figure could be the figure used for revaluation of active member benefits which can negative, or the figure used to increase pensions in payment, which is capped at zero in the event of deflation. However, deflation is so rare it has a marginal impact on value.

hugheskevi

This is why I think that it is a good deal (for me) I'm 57 so average 55.5 when I bought the additional pension. Not only that, but I have a lot invested in property and will also have quite a bit in shares by the time I reach 65, so I think it adds some diversity to my portfolio.

This is a very important point, and one of the important features of Added Pensions and Defined Benefit pensions more generally.

It wouldn't be unreasonable to categorize public sector Defined Benefit pensions as being somewhere between gilts and corporate bonds in terms of investments. They are not quite as safe as gilts due to the extra policy change risk, and the discount rate used in calculations of CPI+3% (which determines the price) is probably more akin to high quality corporate bond yields than gilts.

Hence the first portion of Defined Benefit pension wealth is extremely valuable in giving diversification and risk reduction to a retirement portfolio dominated by Defined Contribution and other investment wealth, making planning easier and also increasing expected returns from the remainder of the portfolio which doesn't have to worry as much about diversifying into lower risk, lower return assets.

Personally I have 100% of my Defined Contribution pension in equities, but when viewed across my entire portfolio (classifying DB wealth as bonds) my risk exposure looks very conservative for my age.

So those considering Added Pension / Faster Accrual should consider it in terms of their overall portfolio - personal pensions may well be very attractive if they already have a lot of DB pension wealth, as they may want more risk in their investments (risk is not necessarily bad, although it is often perceived to be).

kidmugsy

chucknorris wrote: »

But if I was under 40 years old I can see hugheskevi's point, that's an awful long time to accept growth at only CPI level.

How have the Japanese done over the last 25 or so years?

kidmugsy

Anomaly100 wrote: »

Additional pension will be re-valued by figures provided by HM Treasury. It will not attract the in-service indexation that main career average or faster accrual benefits receive.

What on earth do they mean by that? How will the Treasury figures be arrived at? Pulled from their fundament? Seems unlikely.

hugheskevi

What on earth do they mean by that? How will the Treasury figures be arrived at? Pulled from their fundament? Seems unlikely.

By a Treasury Order.

"For the purposes of making such an order the Treasury may determine the change in prices or earnings in any period by reference to the general level of prices or earnings estimated in such manner as the Treasury consider appropriate."

Source: Public Service Pension Act 2013.