Additional contributions to TPS - thoughts?

Lomcevak

Background, Mrs. L is a full professor, working full time at a UK university, enrolled in the TPS with about 15 years total service (split between the 80ths scheme with NPA60 and the career average scheme with NPA67). Salary £60k, early-mid 40s, and not planning on retiring early (might become an option in the future, but we'll explore the implications of that closer to the time).

We'd like to make circa £5-6k per annum in additional payments into her TPS scheme which would take her down to just below the higher-rate tax threshold, and we are thinking of the additional pension option within the TPS, with the maximum option (£6750). She already makes a small monthly payment into an AVC scheme with Prudential.

Looking at the calculator on the TPS website, we would pay £6,450 per year for 15 years (taking her to almost 60) to get £6750 additional pension with dependent benefits - I think that would be a net reduction in take-home pay of £322/pm which we can comfortably do without.

I think that £6750 is index-linked, so the indexation and tax relief make it look a good option, but I've always been on DC schemes and not very familiar with DB or the TPS so would appreciate a cross-check from the board and pointers for things to think about that I might have missed (obviously i'm not looking for advice ).

In case it's at all relevant, I contribute the full pension allowance each year into my (DC / SIPP) pensions, with a view to potentially retiring earlier. Mortgage is a couple of years away from being paid off. We would likely use my pensions and/or savings to bridge across if she did decide later that she would like to retire earlier.



Thanks in advance for any thoughts.

Silvertabby

Would this £6750 per year additional pension be reduced for early payment if taken before NRA (67)?

Sobraon

I took my TPS pension last year after 30+ year’s university teaching (although I keep being pulled back!).

I made Additional Pension, Past Added Years (no longer available) as well as normal contributions into the TPS. In addition I have a SIPP and two 'with profits' pensions with UK insurance firms.

If I had known in my mid 40s what I know now I would have shovelled the maximum into the TPS defined scheme and not have bothered with the SIPP or the 'with profits' arrangements.

Regarding the PRU teacher’s arrangement - the best I can say is that I have never heard a positive comment about the scheme from any colleague.

As Prof. L will be on SSG watch out for the pensions Life Time Allowance, present maximum DB pension is I believe just over £50k expected to rise with inflation before the additional tax charge kicks in.

OldBeanz

Someone will no doubt be along to crunch the figures for you but in general HMG based added pension tends to be good value especially if contributions are from HRT.
One statement you made about retiring early and exploring the options closer to the time is concerning as you should be lining that up now if you want to achieve that or perhaps moving to part time work post 60.
Whatever you do, with an already comfortable life, then ensure all HRT goes towards a pension of some sort.

Lomcevak

Thanks everyone. Regarding early retirement, to date we've focused more on shaping our finances so that I could 'retire' (or possibly 'downsize' my job) early; i'm in a high-salary/high-stress role that I don't particularly love, while she's managed to avoid management responsibilities on her way to professor and is therefore in the fortunate position of being well-paid to do what she loves. If I was to speculate, I'd suspect that she'll become one of those emeritus professors who still spends time on campus interacting with students on retirement, but I do take the point, a lot can change in 20+ years, so we should consider what would happen if she wanted to retire early.

I have very little understanding of DB schemes really (never been on one) but I have the impression that it's better to put alternative funds in place to cover the period from early retirement until the DB scheme kicks in, rather than taking the DB scheme early and taking the reduction on it. Is that right? Or should I be looking in more detail at what it means to take it early?

To date, our focus on pensions has been fairly limited - we aren't doing anything particularly wrong (I put my full annual allowance into a sensible set of DC funds so have a bit over £500k across two company schemes and a SIPP, she has the TPS DB scheme, assuming no legislative changes we will both get full state pensions) but this has not been aligned with any specific plan. Fixing that is part of the reason i'm asking this question

Sobraon - I didn't understand the "As Prof. L will be on SSG" comment, what's SSG? I googled but didn't manage to find the magic combination of keywords to tell me

The Pru scheme doesn't look terrific, but we were thinking of using AVCs to that to soak up any remaining higher-rate salary (subject to annual allowance, of course, I need to find out how that works with a DB scheme).

If the reputation is that poor though should I be looking elsewhere?

Sobraon

Sorry, SSG = Senior Staff Grade, likely to be above point 51 on the pay spine.

Lomcevak

Sobraon wrote: »

Sorry, SSG = Senior Staff Grade, likely to be above point 51 on the pay spine.

Thank you - yes, she is (think point 53 but i'd have to find out).

OldBeanz

The advantage of the Pru AVC is that the money comes directly off your pay which means you do not have to reclaim your HRT element from HMRC every year. You should do your own research as most default AVC schemes now offer a range of investments but many people just go for the default option and only realise 20 years later that the default may be low risk and not be the best performing. Pru have been bringing their charges down as well.

OldBeanz

One other thing to consider is how big you want the DB pension to become. As you appear to be aware, the maximum pension value without incurring penalties is £1m. In DB terms that is £50k pa. Drawing that each year puts you into HRT and an £8k state pension would mean paying HRT on circa £16k pa. This is why so many doctors are retiring early as a pension over £35k means using tax avoidance schemes or paying the tax they saved on the way in.

marlot

OldBeanz wrote: »

One other thing to consider is how big you want the DB pension to become...

Yes, I was about to caution that the lifetime allowance may well become a factor.

marlot

Lomcevak wrote: »

...I have the impression that it's better to put alternative funds in place to cover the period from early retirement until the DB scheme kicks in, rather than taking the DB scheme early and taking the reduction on it. Is that right? Or should I be looking in more detail at what it means to take it early? ...

I shall be taking mine early. By the time I factor in the effect of the lifetime allowance tax, it becomes the best option.