Teacher pension scheme options

foofi22

Hi


My wife (standard rate tax payer) is a member of (and currently pays into) the teacher pension scheme (TPS)

She'd like to contribute extra towards retirement (to hopefully enable an earlier retirement) but is unsure what option is "best"

The options within TPS are far as we know are:
- additional pension.
- faster accrual
- reduce NPA to 65

Or outside of the TPS:
- contribute to a S&S LISA
- contribute to a personal pension

I generally understand the differences between LISA and personal pension options. Although I don't particularly know which of these two is better in our case. I like that LISA is tax free but contributions stop at 50 and has a slightly higher access age.

We have no idea about the TPS options, which is the crux of this post.

We know the TPS scheme is a "good deal " but are any of the three options a good deal?

As an example, the online calculator for additional pension says that it would cost £1449 a year for 20 years to get £2000 extra pension which to me at least doesn't seem overly generous.

Is one TPS option better than the others? For example is it "better" to (a) pay to reduce NPA to 65 or (b) buy faster accrual and retire at 65 but take the actuarial reduction?

I realise this might be a bit open ended but just looking for some general guidance and thought on what other people might be doing

Thanks

rawhammered

I too would like to know this!

kangoora

I'd be interested in the options also, mainly to inform my son (24 years old) who has just started his 'training year' as a maths teacher - part-timing schools and Uni.

stephenadarglas

Firstly sign up and become a member of the website https://www.teacherspensions.co.uk.

There are numerous calculators you can use to see what you can be entitled to at various retirement years.

Also you can make AVCs (additional voluntary contributions) through the Prudential.

Of course you could also set up your own Self Invested Personal Pension as well as the Pru options for investments can be limited. Costs are also a factor.

tony4147

stephenadarglas wrote: »

Firstly sign up and become a member of the website https://www.teacherspensions.co.uk.

There are numerous calculators you can use to see what you can be entitled to at various retirement years.

Also you can make AVCs (additional voluntary contributions) through the Prudential.

Of course you could also set up your own Self Invested Personal Pension as well as the Pru options for investments can be limited. Costs are also a factor.

My wife went the AVC route with the TPS about 8 years ago, to be honest it's grown very, very little over the years, probably just kept pace with inflation, the choice of funds with Prudential is very limited.
The only gain she has made is the fact that she is a high rate tax payer so gains the 40% relief.

hugheskevi

My wife (standard rate tax payer) is a member of (and currently pays into) the teacher pension scheme (TPS)

If there is prospect of her becoming a higher rate payer, it would probably be better waiting until then, investing money that would have gone toward the pension into an SSISA for the time-being.

- contribute to a S&S LISA

I'd divide this into both SSISA and LISA for purposes of comparison, they have different features.

SSISAs are excellent for funding years before minimum pension age, or for funds that will benefit from being moved into a pension later, eg, when a higher rate taxpayer or benefiting from salary sacrifice.

I like that LISA is tax free but contributions stop at 50 and has a slightly higher access age.

Contributions stopping doesn't matter, that just affects what you do at age 50. If a LISA is the best option until then, contribute to it.

The options within TPS are far as we know are:
- additional pension.
- faster accrual
- reduce NPA to 65

We know the TPS scheme is a "good deal " but are any of the three options a good deal?

The options are all priced actuarially, with a discount rate (which is effectively a guaranteed rate of return in this context) of CPI+2.4%. That applies if all the actuarial assumptions are accurate in your wife's case. That will not be the case (eg she will either have a partner or not at retirement, whereas actuarial assumptions are likely to be that something like 90% of members have a partner at retirement and that 90% figure is applied to the whole cashflow projected - your partner cannot of course have 90% of a partner at retirement).

Reducing NPA is probably the most straightforward option, as it is unaffected by changes to State Pension age. Although the age of access to unreduced pension would increase, if you have paid to get the pension 2 years early you still get the pension 2 years early.

From a pricing perspective, Added Pension is almost identical to reducing normal pension age as they both use the same discount rate. The end outcome of buying either with a fixed amount of money would result in a very similar outcome if retiring at a fixed age prior to normal pension age, either with Added Pension increasing the amount of pension which is then actuarially reduced, or a reduced pension age reducing the standard pension by a lower percentage.

However, unlike EPA, Added Pension can exclude dependent survivor pension, so if that is desirable a member may prefer Added Pension to take advantage of the option.

Faster accrual is interesting, as the value of that depends on how long you remain in service and benefit from higher in-service revaluation. You cannot opt-out of things like survivor benefits, you get them (and pay for them, using the actuarial assumptions) whether you want them or not.

So which option is best depends primarily on whether you want survivor benefits or not, and how long you plan to remain in service.

As an example, the online calculator for additional pension says that it would cost £1449 a year for 20 years to get £2000 extra pension which to me at least doesn't seem overly generous.

It depends how you value a return of CPI+2.4% without investment risk. A return of 4.5% - 5% p/a is nothing to write home about in general, but it is a lot higher than any comparable return without taking investment risk.

It also creates a guaranteed income without the cost of annuitisation.That is great if you want a higher guaranteed income, not so good if you want income prior to State Pension age but don't want to reduce your future pension to obtain it.

foofi22

Thanks, that's very helpful.

It's the sort of thing I'm surprised there isn't a "dummies" guide for.

In the group of teachers I know, there is a general lack of interest in pensions - maybe because they view their pensions as so generous that they needn't consider additional planning?

However I think the general population also has a lack of interest in pensions!

Sobraon

Can't comment on the new additional pensions inside the TPS as I was (mostly) under the old scheme. But outside of the TPS the obvious options are the PRU, LISA and SIPP.

PRU advantages are payment is through payroll, negatives are a restricted choice of expensive funds and high charges. I have been a contributing member of the TPS since 1986 and I have never talked to anyone who was retiring who was happy that they had chosen the PRU (this is not evidence just my experience!). Please see my comments on the recent LGPS thread about PRU fund performance, also importantly in the TPS you dont get the great commencement lump sum tax advantage of the LGPS.

LISAs are an interesting new idea the key advantage is the top up. Negatives are as I understand you can't withdraw until 60 without penalty and the LISA counts against you for means tested benefits. So if your wife decided to leave at 55 she couldn't access the LISA without penalty until 60 and couldn't really receive ESA ( if otherwise eligible). I was talking to a friend yesterday and both he and his wife are leaving teaching before 60 ( to go sailing).

With a SIPP you get tax relief of course ( this is normally automatic for basic rate with the likes of Hargreaves) you can 'drawdown' from 55 ( 57 from 2028 I understand) and you have complete control. Negatives are you have complete control and you have to be very careful of charges but that is for another day,

tigerspill

Sobraon wrote: »

Can't comment on the new additional pensions inside the TPS as I was (mostly) under the old scheme. But outside of the TPS the obvious options are the PRU, LISA and SIPP.

PRU advantages are payment is through payroll, negatives are a restricted choice of expensive funds and high charges. I have been a contributing member of the TPS since 1986 and I have never talked to anyone who was retiring who was happy that they had chosen the PRU (this is not evidence just my experience!). Please see my comments on the recent LGPS thread about PRU fund performance, also importantly in the TPS you dont get the great commencement lump sum tax advantage of the LGPS.

LISAs are an interesting new idea the key advantage is the top up. Negatives are as I understand you can't withdraw until 60 without penalty and the LISA counts against you for means tested benefits. So if your wife decided to leave at 55 she couldn't access the LISA without penalty until 60 and couldn't really receive ESA ( if otherwise eligible). I was talking to a friend yesterday and both he and his wife are leaving teaching before 60 ( to go sailing).

With a SIPP you get tax relief of course ( this is normally automatic for basic rate with the likes of Hargreaves) you can 'drawdown' from 55 ( 57 from 2028 I understand) and you have complete control. Negatives are you have complete control and you have to be very careful of charges but that is for another day,

Are the PRU payments salary sacrifice and hence attract the NI payment reduction as well and tax free?

Sobraon

No that's not what I meant. At one time my institution dabbled with this but it was voted down because of fear over the impact on the salary of reference ( now history). I was thinking about the difference in treatment for tax purposes of the PRU 'pot' between the LGPS scheme and the TPS

AnotherJoe

Offhand, seems to me that its preferable to have a personal pension of whatever type*, outside the TPS, for more flexibility in various dimensions - fund choice, charges, dates when you take it, different admin, if you are dissatisfied you can move it, less likely to be messed about with by yoir employers at a later date.



* LISA, personal, SIPP