Teacherss Pensions 'Flexibilities'

Mr_Muppet

All,

I would really value advice on the following questions. I recently found out that I have the option to purchase flexibilities in my pension. Two options are attractive:
1. Buy out up to 3 extra years to bring my pensionable age from 68 to 65. This would cost me approx 2.4% of my salary for the rest of my career, circa £100/month right now.
2. Buy faster accrual which would cost circa 5% of my salary (i.e. £200) for each year that I choose to do it . I would accrue pension at a rate of 1/45th of my salary per year rather than 1/58th.

I am 35 and would ideally like to retire early. The plan is to do so when I turn 55. I would need 10-12 of savings to cover those 12 years until my pension kicks in. My wife intends to keep working and we should have the mortgage paid off (13 years early) by age 42 so I will be in a position to save more after that. I currently save £50 into a sipp just to start to build the extra pension pot - not much but with £1900 going into mortage & other savings per month I'm happy!

Does it sound like a good idea to buy either of these?

Thanks,
MM

hugheskevi

It appears you are earning £50,000 which will mean you are currently paying £5,100 into the Teacher's Pension Scheme and £600 into a SIPP each year (on which you are presumably claiming higher rate relief from HMRC). That leaves a taxable income of about £44,300 leaving about £1,915 of taxable income subject to higher rate income tax (more if you have other income).

1. Buy out up to 3 extra years to bring my pensionable age from 68 to 65. This would cost me approx 2.4% of my salary for the rest of my career, circa £100/month right now.

Nothing particularly right or wrong with this option. All contribution benefits from higher rate relief, all benefits fall due between age 65 and age 68. If the Annual Allowance becomes an issue in the future this becomes far more attractive, as it doesn't count toward the Annual Allowance at all.

2. Buy faster accrual which would cost circa 5% of my salary (i.e. £200) for each year that I choose to do it . I would accrue pension at a rate of 1/45th of my salary per year rather than 1/58th.

Probably not attractive, given you intend to leave early (although it depends on actuarial assumptions used in the calculation about expected length of service). While you are an active member your pension is revalued at CPI+1.6% but once you leave it is only CPI. So if you leave at age 55 you get 20 years revalued at CPI+1.6% and 13 years revalued at CPI.

A very similar alternative is to buy Added Pension, the revaluation rate of this is CPI regardless of whether you are active or deferred.

More into the SIPP (or any personal pension) is also a consideration. I'd question putting so much into the mortgage whilst you are paying higher rate tax.

The way I see it you probably have 3 sensible alternatives:

1. Buy-out - purchase income only for years between 65-68
2. Added Pension - purchase income for age 68 to death
3. Personal pension - provide capital, ideal for age 58-68

The main question is then what are your income needs post 68, and do you need more income than you will build up in the main scheme over the next 20 years. If so, Added Pension is more attractive. If you have adequate income post 68 and a low risk tolerance, buy-out may well be a good choice. If you need capital between 58-68 more into a personal pension is a good choice. In general, the higher your risk tolerance the more attractive personal pension saving is to the other options.