TPS Teachers Pension Scheme: can you help me understand faster accrual vs additional pension ?

V_for_viennetta

I have been in the TPS for only a couple of years, so I'm in the career average scheme. I understand I can buy faster accrual and additional pensions, but have some questions:

What are the differences between buying £1,000 more via faster accrual and £1,000 more via additional pension? Why is faster accrual more expensive? In my case, it costs me about £15 to accrue £1 more via faster accrual, and about £10 to buy £1 more via additional pension (with dependant benefits). Is this because the faster accrual amounts are revalued by inflation + 1.6%, while the additional pension by inflation only? Or are there other differences, too?

There is a limit of £7,000 to the additional benefits you can buy. Does this mean £7k in faster accrual + £7k in additional pensions, or £7k across both? The TPS first told me, in writing, that what you put in one doesn't affect what you put in the other, then they sent me a letter about faster accrual which says the opposite.  I have contacted the TPS again but they are not answering. A PDF on their website suggests it's £7k across both. But another page states that "The amount of extra pension available, separately, in each arrangement is a fixed amount" which is not clear at all (I can't post links).

The context is that I have inherited some money and am considering using some of that for my pension.

HR are useless; they say they don't offer "consulting" - but this is not consulting, I am not asking what would be better for me, I am simply asking how the scheme works!

The TPS takes it time to reply and, if previous experience is representative, I'll have to chase them multiple times before having an answer.

Thanks!

xylophone

https://community.tes.com/threads/faster-accrual-vs-additional-pension.782290/

V_for_viennetta

Thank you. So, if I understand correctly:

• The additional pension goes up by inflation, and nothing else, for both active and non-active members (e.g. someone who now does another job and no longer contributes to the TPS)
• The faster accrual bit goes up by inflation + 1.6% only for active members; for non-active, it goes up by inflation only
• So if you think you are likely to leave the TPS in a few years, you'll be better off buying additional pension  rather than faster accrual: the former costs much less but they both get revalued the same once you're out of the scheme
• If instead you think you will be in the TPS for a long time, then whether the extra cost of the faster accrual vs additional pension is worth it will depend on where annuity rates will be, how much other investments might yield etc (good luck forecasting that!)

Is all of this right? Have I missed anything?

V_for_viennetta

PS Another question: faster accrual is bought via salary sacrifice, so I also get the benefit of saving national insurance.

If I buy some additional pension as a lump sum, is it correct that it wouldn't be via salary sacrifrice? Ie I'd have to claim the tax back later, but I wouldn't save a penny on national insurance?

Sun-Is-Fun

V_for_viennetta said:

PS Another question: faster accrual is bought via salary sacrifice, so I also get the benefit of saving national insurance.

If I buy some additional pension as a lump sum, is it correct that it wouldn't be via salary sacrifrice? Ie I'd have to claim the tax back later, but I wouldn't save a penny on national insurance?

If bought as a lump sum, you would normally inform the tax people (they alter your tax code) so you claim back the tax paid on your lump sump contribution monthly that way.

V_for_viennetta

mjfp509 said:

If bought as a lump sum, you would normally inform the tax people (they alter your tax code) so you claim back the tax paid on your lump sump contribution monthly that way.

Yes, of course, but the question was about national insurance, not income tax. Is there a way to claim national insurance back if you buy additional pension with a lump sum contribution? I'm afraid not, right?

Dazed_and_C0nfused

Salary sacrifice, which is where your employer contributes to the pension not you, is the only way to save NI with pension contributions.  And this is simply because you aren't actually contributing to a pension, you are agreeing to a lower salary in return for your employer contributing so you save tax and NIC by not having the salary taxed/NIC'd in the first place.

No other method of contributing to a pension saves NI.

If you make a lump sum contribution you need to be 100% certain that you understand what you are signing up for tax wise.  This is an area posters on here often come unstuck.  They have problems getting HMRC to understand you can make such a payment and need HMRC to deal with any tax relief due. 

And more importantly they often misunderstand the tax relief due.  There is no automatic x% tax relief with these type of lump sum contributions so it is possible to pay say £10,000 and get no tax refund.  Someone else could pay £10,000 and get £4,000 refund, or more in extreme circumstances.

V_for_viennetta

Fair points, thanks for highlighting them.

To be clear, the only times you'd get no tax refund are if you already maxed out your pension contributions for the year, or if you don't have enough taxable income compared to the contribution you have made. I.e. the personal allowance is 12,500, so if you have an income of £10k and make a £1k lump sum contribution you are not entitled to claim any tax back because you have never paid any tax in the first place. If your income is £13,500 and you contribute £ 2,000, you get tax relief on £1k only. Etc

xylophone

If you make a lump sum contribution you need to be 100% certain that you understand what you are signing up for tax wise. 

See https://www.teacherspensions.co.uk/-/media/documents/member/factsheets/managing-your-pension/additional-pension-factsheet.ashx?rev=f76a6a51a67c486c92f9c05bb8d61753&hash=C8DCB15675C913FB9B1F6BBDA1C75DD3

You’ll normally receive tax relief through the PAYE system if you pay by instalments. You’ll need to speak to the tax office about tax relief if you make a lump sum payment.

And this  (last post in thread)   https://forums.moneysavingexpert.com/discussion/comment/76857937#Comment_76857937

re "concessional relief".

Dazed_and_C0nfused

V_for_viennetta said:

Fair points, thanks for highlighting them.

To be clear, the only times you'd get no tax refund are if you already maxed out your pension contributions for the year, or if you don't have enough taxable income compared to the contribution you have made. I.e. the personal allowance is 12,500, so if you have an income of £10k and make a £1k lump sum contribution you are not entitled to claim any tax back because you have never paid any tax in the first place. If your income is £13,500 and you contribute £ 2,000, you get tax relief on £1k only. Etc

There have been several posters on here who have not grasped that concept and mistakenly assumed that all contributions will get tax relief even when no tax has been paid.

I suspect that "relief at source" contributions is where this possibly muddies the water for some people.

V_for_viennetta

V_for_viennetta said:

• If instead you think you will be in the TPS for a long time, then whether the extra cost of the faster accrual vs additional pension is worth it will depend on where annuity rates will be, how much other investments might yield etc (good luck forecasting that!)

Actually, one can make some very indicative calculations.

1) If it costs you £ 10 to buy £1 of additional pension, you are 30 years from retirement and annuity rates will be 3.5%, then  this means the return, in real terms (ie after inflation) from buying the additional pension is:

10 * (1+i)^30 * 3.5% = 1

(1+i)^30 = 1 /10 / 3.5%

i = 3.56% , which is not too bad, because this is a guaranteed real return, after inflation. It's not impossible to do better by investing in the stock market, but it's also quite possible to do much worse.

2) If it costs you £ 15 to buy £1 via faster accrual, but this pound revalues at inflation + 1.6% every year, then the real return of investing these £15 will be

15 * (1+i)^30 *3.5% = (1+ 1.6%)^30

(1+i)^30 =1.016^30 /15 / 3.5%

i = 3.81%

3) If you buy faster accrual but then immediately leave the TPS, you lose the additional 1.6% uplift and the corresponding return plummets to:

15 * (1+i)^30 * 3.5% = 1

i = 2.17%

Of course no one has a crystal ball. Who on Earth knows what the annuity rates will be 30 years from now. But at least these simple calculations help us understand that:

• as long as you stay in the TPS and benefit from the inflation + 1.6% uplift, then the faster accrual will yield more, even if it costs more (i.e. it's not a rip off)
• the additional return from faster accrual is not huge, so whether it's worth the extra cost is debatable. If you are fairly confident you'll be in the TPS long term I'd say go for faster accrual, but, if you don't know, I'd say go for additional pension: if you stay in the TPS it will return a bit less, but if you leave the scheme it will return a lot more