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Teacher pension scheme options

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  • zagubovzagubov Forumite
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    tony4147 wrote: »
    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.

    If you want the AVC to go into drawdown instead of say an annuity, there's a number of hoops to jump through. I'd not have bothered with having one if I'd known this at the start. I also stopped paying into my AVC when I worked out how expensive it was compared with what you could get, and put money into buying extra teachers pension, which I wish I'd done from the start.
    There is no honour to be had in not knowing a thing that can be known - Danny Baker
  • SouthLondonUserSouthLondonUser Forumite
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    If I understand correctly, faster accrual and additional pension are more similar than most people realise. In both cases you are buying additional pension, but, with faster accrual you are buying it as a % of your salary, while with additional pension you buy a fixed amount in GBP and then decide how to pay for it (lump sum, over x years, etc).

    Both options are subject to certain limits, i.e. you cannot buy more than ca. £7k worth of additional pension; the exact limits are here: https://www.teacherspensions.co.uk/updates

    Additional pension contributions can be deducted from your salary; it's not clear to me if that is via salary sacrifice and if therefore you benefit by paying less national insurance. Of course, if you contribute more than your salary, you wouldn't get a tax rebate on the part > salary. E.g. if your salary is £25,000 and you inherit some money, don't spend £30k to buy some additional pension all in one go - do it over 2 years at least.

    As for additional voluntary contributions via Prudential, does that have any advantage vs setting up your own pension with another provider? Unless it's salary sacrifice and you save on the national insurance, I can't think of why one would want to do it via Prudential (other than laziness and inertia).

    The TPS website has a calculator: https://www.teacherspensions.co.uk/members/calculators/flexibilities.aspx

    I get the impression not many people realise what a fantastic deal the TPS is. It is anunfunded liability of HMRC - what that means is, simplifying, that the money you pay into the scheme is spent every year by the state, and every year the pension liabilities are met with the funds available to the State. This is in contrast with a funded scheme, which collects money every year, invests it, and must use that money to pay a pension to its members. For example, academics of older, often more prestigious universities are very mad that their colleagues in the ex-polytechnics are in the TPS, while they are in the University Superannuation Scheme, which has been in crisis for a while (look up the headlines).

    In a banana republic, having your pension as an unfunded liability of the State is not good, but in a moderately stable and reliable advanced economy it is better- IMHO a scheme like the USSS is much more likely to be in trouble than the TPS, as events have shown. You are of course welcome to have a different opinion.

    Another thing to bear in mind is double taxation treaties. I remember reading somewhere that public pensions like the TPS are not tax free if you move to countries which give tax breaks to pensioners (eg Portugal).
  • zagubovzagubov Forumite
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    I get the impression not many people realise what a fantastic deal the TPS is. It is anunfunded liability of HMRC - what that means is, simplifying, that the money you pay into the scheme is spent every year by the state, and every year the pension liabilities are met with the funds available to the State. This is in contrast with a funded scheme, which collects money every year, invests it, and must use that money to pay a pension to its members. For example, academics of older, often more prestigious universities are very mad that their colleagues in the ex-polytechnics are in the TPS, while they are in the University Superannuation Scheme, which has been in crisis for a while (look up the headlines).

    In a banana republic, having your pension as an unfunded liability of the State is not good, but in a moderately stable and reliable advanced economy it is better- IMHO a scheme like the USSS is much more likely to be in trouble than the TPS, as events have shown. You are of course welcome to have a different opinion.

    Another thing to bear in mind is double taxation treaties. I remember reading somewhere that public pensions like the TPS are not tax free if you move to countries which give tax breaks to pensioners (eg Portugal).
    Well, sort of. Teachers and their employers have to pay up to 10% and 23% respectively into the scheme. So it is sort of funded. The private sector schools have to either offer something else or pay more into the scheme.

    Still it is better than the pre-1992 university USS scheme.

    I've heard good things about retiring to Portugal. Might need more exploring.
    There is no honour to be had in not knowing a thing that can be known - Danny Baker
  • SouthLondonUserSouthLondonUser Forumite
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    It is unfunded in the sense that, if I understand correctly, the money teachers pay into the scheme is not set aside to meet the pension liabilities of the fund, but spent by the State. The scheme is explicitly defined as unfunded in its annual report.
  • zagubovzagubov Forumite
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    It is unfunded in the sense that, if I understand correctly, the money teachers pay into the scheme is not set aside to meet the pension liabilities of the fund, but spent by the State. The scheme is explicitly defined as unfunded in its annual report.

    What I meant to say is that the scheme takes in sufficient money needed to pay out to the future pensioners, rather than the current ones, IYSWIM.

    The state does guarantee to make up any shortfall, right enough.
    There is no honour to be had in not knowing a thing that can be known - Danny Baker
  • SouthLondonUserSouthLondonUser Forumite
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    That I don't know. Is it in the annual report? How do you know? Not saying it's wrong, just that I'd be curious to learn more.

    Even if true, the fact remains that the money isn't set aside but spent by the State. That's why you are effectively taking country risk and in a banana Republic this would be a very bad structure.
  • edited 19 October 2019 at 6:32AM
    JoeCrystalJoeCrystal Forumite
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    edited 19 October 2019 at 6:32AM
    zagubov wrote: »
    What I meant to say is that the scheme takes in sufficient money needed to pay out to the future pensioners, rather than the current ones, IYSWIM.

    The state does guarantee to make up any shortfall, right enough.

    As far as I can see, the TPS does not have enough contributions coming in to pay the current pensioners. The TPS's expenditure was £9.7 billion in 2017-18, and with only £2.3 billion from the teachers and £4 billion from the schools, the Treasury has to top it up by £3.4 billion. I have little doubt that in the very long term future, such dear schemes will be closed and switch over to DC pension schemes.
  • hugheskevihugheskevi Forumite
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    The funding arrangements for the unfunded public service pensions are as follows:
    • Every 4 years there is a Valuation of the scheme. This determines the employer contribution rate required.
    • The Treasury sets the assumptions to be used for the Valuation
    • A key assumption is the discount rate, which is effectively the assumed rate of return. A higher discount rate reduces the contributions required and vice versa. Over recent years the discount rate has been reduced due to lower expected future GDP growth as a consequence of Brexit.
    • The contributions of members and employers fund both the cost of current pension accrual and also a 'notional past service deficit.' They may also fund administration costs (varies by scheme).
    • The notional past service deficit is the difference between the pot of notional assets that is tracked and compared to liabilities. No pot actually exists, and as the result is heavily determined by the discount rate, it is very dependent on what HM Treasury assumes the discount rate is. As such, it is more a tool for the Exchequer to determine employer contribution rates than any sort of genuine deficit.
    • Each year the Exchequer votes money to employers, then takes the money back through employer contributions. Hence this is just money moving from account to account and so employer contribution rates do not really matter. Employers do have to pay them, so they are real in that sense, but it is just a part of their total budget which HM Treasury takes account of when deciding the total budget.
    • There is an accounting exercise under which member and employer contributions are used to pay pensions, with any surplus returned to the Exchequer and the Exchequer making up any shortfall. But this is just accounting.
    The above system means employers do bear the cost of their hiring and salary decisions through employer pension contributions. Note, there are some private sector employers participating in the schemes and the position is different for them, but most employers receive their money from HM Treasury.

    The system can also be presentationally helpful, for example, a large increase in allocated NHS spending could be partially clawed back by lowering the pension discount rate and so increasing the employer pension contribution rate.

    So to summarise,
    • There is no pot of money
    • Employer contributions are mostly about ensuring employers take account of pension consequences in their employment decisions
    • Employer contributions are primarily just money being given by HM Treasury to Departments and then taken back so do not help fund the scheme in any meaningful sense.
    • Member contributions do help with funding, and an accounting process nets these from pension paid out. However, this is just accounting, and it makes no difference whether member contributions were to go directly the Exchequer and the Exchequer fund all pensions or whether member pension contributions are offset from the pensioner payroll bill with the Exchequer picking up residual savings/costs each year.
  • hyubhhyubh Forumite
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    hugheskevi wrote: »
    The above system means employers do bear the cost of their hiring and salary decisions through employer pension contributions.

    On that particular point, to an extent, though the risk is all with the taxpayer if the actuarial assumptions that have determined the contribution rates don't bare out. Employers (even private schools) account for the TPS on a DC basis (i.e. contributions as an expense on the balance sheet, not future pension payments as a liability). Whereas a private school in the LGPS (not many, but there's still a few) account for that scheme on a DB basis. A private school leaving the LGPS is a big deal (exit valuation, pay off its share in the deficit), the same school leaving the TPS, not so much, from a funding POV.
  • hyubhhyubh Forumite
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    JoeCrystal wrote: »
    I have little doubt that in the very long term future, such dear schemes will be closed and switch over to DC pension schemes.

    But then you have the problem of paying for current pension payments at the same time as contributing to active members' own pension pots.... Maintaining a DB-like structure, but with proper risk-sharing, would help, but the Coalition government completely mucked that up (from the taxpayer's POV) last time around...
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