Teachers Pension - Which is cheaper?

FIRSTTIMER

I want to purchase the maximum Addittionall Benefit Available to me. Currently £6750.

Which works out cheaper;

APB
Purchase the Full Amount of £6750 - in £250's and pay the full amount needed over 20 years.

Faster Accrual
1/45 yearly elections. This seems expensive when I use the calculator online and I increase in age. The extra benefit of £250 is way more expensive as I age than fixing the cost now with APB.

Buy Out
I currently do this (3 year) but contemplating cancelling this as it presumes I will work right up to age 65 and just do the APS and fix the amount and cost now that I can buy and then in 20 years I know I have bought the maximum I can at a price which was cheap now.

I plan to stop working at around 55-60.

Hit me with advice peeps.....

FIRSTTIMER

Well this went down like a lead balloon

Kynthia

FIRSTTIMER wrote: »

Well this went down like a lead balloon

I guess people don't know. Plus I don't think you've included enough information for those that don't know the TPS scheme to have a go at comparing.

What is it you have to pay and what do you gain for each three options? Is APB buying additional pension from NRA? I don't kniw what faster accrual is. Is buy out a way to reduce your NRA?

hugheskevi

First thing to note is that from an actuarial perspective, the cost of all the options will be the same, calculated using a discount rate of CPI+2.4%.

However, the actuarial assumptions will differ from your personal position in 2 potentially significant ways:

1. Remaining length of service
2. Spouse benefits - to calculate the cost of these you will be assumed to have a spouse 3 years younger than yourself assuming you are male. If your spouse is a lot younger, this would be a good deal. If your spouse is a lot older (or doesn't exist) then the assumptions do not favour you.

You may also have views on how the scheme assumptions about the following affect you, but as they are common across all options they are not of great interest in choosing between options. As you want to purchase at least one of the options, presumably you are happy with these assumptions and the price they generate.

1. Life expectancy - you will be assumed to live to just under 90 years of age
2. Discount rate - this gives an assumed rate of return of 4.448% p/a in the long run - a bit low in comparison to the return after charges you might hope for from a typical DC scheme, but higher than any option free of investment risk).

Added Pension doesn't take into account remaining length of service for calculating the benefit and the costs, and you can choose whether to benefit your spouse's position. This makes the option quite neutral compared to the others, in that you are fairly sure about what you will receive and can choose to pay for spouse benefits or not.

Faster Accrual will build up main scheme pension faster. Main scheme pension has a better revaluation rate if you are in service. The actuarial assumptions will assume how long on average someone like you will remain in service. If you plan to remain in service longer than assumed, you win, if you remain in service for less time, you lose. You say you plan to stop working between age 55-60, which is a long way from the normal pension age of 68 so perhaps this isn't the best option. Under this option you build up (and hence pay for) spouse benefits whether you want them or not.

With buy-out you do not pay for (or receive) spouse benefits. Also, you pay the extra now to receive this part of your pension at NPA-3 and so there will be assumptions about how long you remain in service and so benefit from enhanced revaluation. If you remain in service beyond the assumed length of time, you win, if less, you lose. This option doesn't lead to a pension input unlike the other two, so if the Annual Allowance is or may be an issue it makes this option more attractive.

So based on the limited information available, I'd say Added Pension is probably the cheapest, followed by buy-out, followed by faster accrual.

If you want to purchase the maximum possible enhancement then you should explore the order of purchase. I know in some similar schemes the rules are something like that as long as you have not hit the £6,750 limit you can enter into a contract to purchase as much buy-out as you like (and so go well beyond £6,750) but not the other way around, ie, if you had used up the equivalent of £6,400 with a buy-out contract you could only purchase £350 of Added Pension.

You might also want to explore whether Defined Contribution contributions (either in addition to or instead of the enhancements to the Teacher's pension) may be appropriate for funding the period between age 58 and 68 in particular.

That is all quite speculative in the absence of detailed information, but hopefully a bit of food for thought to help shape your decisions.

zagubov

Are we still talking about the Teacher's Pension?

FIRSTTIMER

Thanks for this. I have actually purchased around £3000 using the 3 year buy out - but that assumes I will be in service until age 65. So I have around £3750 to purchase using either FA of APB. The TPS FA calculations have told me I will max that £3750 out in say 10-13 years and drop to just buy out by then.

My idea was to cancel the lot and purchase the maximum I can using APB fix it over 20 years. Then, at around age 55, I know i have purchased the maximum I could voluntarily and if I cease employment and live off savings/sipp/Lisa between late 50’s to 65.

The other benefit of maxing using APB seems to be that if I get ill over next 20 years - I get to keep the full amount regardless of how much I have paid for it into the 20 year contract? Which FA and Buy Out doesn’t allow - it will be reduced.

I just have a feeling FA and Buy Out is costing me around 8% extra and is increasing yearly, but I may get to age 55 and not even have got the full £6750 limit, which then means I may have to pay well in excess to top up the remaining full amount before ceasing employment. When in fact, I could have paid it over 20 years now and by the time I am 55, my pension voluntary top up is maxed out anyway?

OldBeanz

Did the comparison last year for my son who had just started ( not as detailed as Hugheskevi) and came to the added pension conclusion, partly, as this was the most straightforward. He is also putting money into a SIPP which will allow him to bail out early although he may go down the AVC route later.

FIRSTTIMER

Thanks for this - I think I am going to do FA until I can no longer (around 7/8 years and then review when its a decision to either carry on with Buy Out or Cancel and do FA for another 7/8 years and no I have maxed out in say 15/20 years time so I can still claim what I have built up at age 65 without any reduction I continue Buy Out. As I am led to believe Buy Out means I can claim whatever I have built up from age 65 without any reduction.

Oliver1191

Based on the limited information provided, I thought it might be worth adding some additional thoughts for you to consider.

1. What if you leave teaching or move to another school? It sounds like you're just starting your career - I could be wrong. If you set up to pay off all this pension over 20 years, then leave the profession in 5, what happens? Do you still owe TP money? It might be worth clarifying exactly with them, before committing. Equally, TP are a nightmare. I have had telephone conversations where i'm 45th in the queue. They regularly do not action something (even when they've stated they would). The system is quite 'fragile' in my experience. If you move schools, problems can quickly come up - I purchased £250 over 2 years with my last school. I've been at my current school for 2 years, and due to a mistake made by the previous school's payroll, this still hasn't been set-up for me to complete paying. It's taken a lot of time on my part to get various problems sorted (TP / payroll usually say it's not their responsibility, but the other party's - no one takes responsibility). It's only because I pay close attention to my pensions that I spotted several errors had been made - most people just pay their pension and assume it will all be ok. I would suggest that if you want to buy extra pension, buy as much as you can (or want) over a 1-year period. If your goal is the same the following year, you can always buy more.


2. How much do you need to be financially independent? I recently realised that i'm already exceeding the minimum amount for FIRE I need from 68 - when I add my TP, small LGPS and my state pension together (i'm currently 35). Whilst I would not want a lean FIRE, knowing this figure can allow you to re-evaluate how to achieve your goal. So, in my case, I continue to pay into TP (for now), but focus all my extra money on investing in my SIPP / LISA / ISA. If you're new into the profession, you may consider over-paying to build up a pot, then falling back to the standard amount...it depends on your goal / circumstances.


3. If you invested the money in an idex fund (e.g. through your ISA), would it grow to be a bigger value by 68? There's no guarantee, but it's something to consider.


4. Is having all your eggs in one basket a good idea? This depends on your circumstances. I'm not arguing against the TP - a guaranteed income is a great thing. However, if you can't access it from 68, you've got a long wait until you can access your wealth (unless you want it actuarily adjusted). I've become concerned that proportionately too much of my wealth is in guaranteed pensions. So, whilst I continue to contribute, i'm deliberately putting money into other places to give future flexibility.


I hope that helps!

FIRSTTIMER

This certainly does help. I am looking at doing point 2 for definite.