Teachers pension (career average) - how best to retire early

MaxZorin

Young_worker said:

@german_keeper As far as I can see from stories online and the TPS website - as she joined the TPS in September 2015 (i.e. after career average introduced) she won't be impacted by the McCloud judgement? Or am i missing something?

Correct.  Those who joined after the changes were implemented won’t be affected and will remain in the current scheme.

GunJack

kinger101 said:

GunJack said:

She may be better opening a SIPP or other private pension rather than S&SISA - you could be invested in the same things, but get the 20% tax relief added when the contributions are made, and so they get more time to compound. This would build up, effectively, a DC pot which could bridge the gap between retiring early (and living off the SIPP/PP) so you don't have to take the TPS early and therefore avoid the actuarial reduction that would be applied (yes, to the Post-2015 career average TPS as well as the older final salary one). 30+/57ths of career average TPS by 58, still grows in deferrement by (CPI? RPI? I don't know, but it doesn't stand still), and would be better to leave until scheme retirement age if possible.

The SIPP isn't that tax efficient for BR taxpayers aged below 40.  You might get "20% tax relief" going in, but it's just tax deferment.  The pension will be taxable at marginal rate on exit.  Given the 25% tax free, that means 15% rather than 20%.  So for every 80 p of net salary in, 85 p of net pension comes out.  An uplift of 6.25%.  LISA on the other hand gives one a 25% uplift.

Likewise if TPS is a salary sacrifice scheme (I've no idea), additional contributions get this get a 25 % uplift, as the 85 p net pension costs only 68 p once as NI is also saved (100 p - 20 p income tax, - 12 p national insurance = 68 p).

I'd do cost/benefit analysis of the TPS AVC vs LISA.   

but you're assuming that ALL of the SIPP income is taken at 20% tax - if this is the only income (having retired early) then they'd get the 25% TFLS, plus the first £12.5k pa tax free (personal allowance)....you could end up paying very little if any tax on the SIPP over 10 years.....

Young_worker

So as we are aiming to retire as close to 50 as possible we need to build up S&S ISAs to focus on bridging between 50 and 58 as a minimum and which we are already contributing fairly heavily towards. Aim is to also have to be mortgage free by then also (am overpaying and signed up to MFW challenge).
We have a good idea of how much we live on monthly, so what we will need come retirement, we are (..I am) pretty frugal apart from the travel....
I'm comfortable my pension will be in a good place at 58 to live off the dividend income (+maximising tax efficiency of how i take it). Question for my partner is then what is best to do from 58 onwards...Options I have noted from others suggestions:
- Take teachers pension at 58 and focus on maximising value of this at that point by accruing greater pension within the TPS e.g. faster accrual 
- Take teachers pension at 58 and supplement with other source (e.g SIPP, AVCS, Lifetime ISA - need to crunch numbers on best one)
- Leave teachers pension until later e.g. 68 and build pot of money to be used in interim to bridge gap e.g. SIPP, AVCs, Lifetime ISA
Need to get my trusty excel out and do some modelling.....
As a side note, does anyone know if teachers AVCs via Prudential can be contributed as salary sacrifice? That would add another option in in terms of tax efficiency. 
Thanks to everyone for their comments - this is all super helpful. 

kinger101

GunJack said:

kinger101 said:

GunJack said:

She may be better opening a SIPP or other private pension rather than S&SISA - you could be invested in the same things, but get the 20% tax relief added when the contributions are made, and so they get more time to compound. This would build up, effectively, a DC pot which could bridge the gap between retiring early (and living off the SIPP/PP) so you don't have to take the TPS early and therefore avoid the actuarial reduction that would be applied (yes, to the Post-2015 career average TPS as well as the older final salary one). 30+/57ths of career average TPS by 58, still grows in deferrement by (CPI? RPI? I don't know, but it doesn't stand still), and would be better to leave until scheme retirement age if possible.

The SIPP isn't that tax efficient for BR taxpayers aged below 40.  You might get "20% tax relief" going in, but it's just tax deferment.  The pension will be taxable at marginal rate on exit.  Given the 25% tax free, that means 15% rather than 20%.  So for every 80 p of net salary in, 85 p of net pension comes out.  An uplift of 6.25%.  LISA on the other hand gives one a 25% uplift.

Likewise if TPS is a salary sacrifice scheme (I've no idea), additional contributions get this get a 25 % uplift, as the 85 p net pension costs only 68 p once as NI is also saved (100 p - 20 p income tax, - 12 p national insurance = 68 p).

I'd do cost/benefit analysis of the TPS AVC vs LISA.   

but you're assuming that ALL of the SIPP income is taken at 20% tax - if this is the only income (having retired early) then they'd get the 25% TFLS, plus the first £12.5k pa tax free (personal allowance)....you could end up paying very little if any tax on the SIPP over 10 years.....

They plan to retire early, so there is scope for tax-free drawdown of SIPP between occupation pension being drawn on along the lines of BishopsBrennan's post.  But once occupational pension is drawn (and definitely state pension), then pension will be taxed at marginal rate.  This is the tax rate applied to that slice of income.   
Even for someone with just state pension and a DC scheme, state pension will swallow up about 75% of the personal allowance straight away.   

daveyjp

I really wouldn't look too closely at the rules now, there are a lot of budgets between now and 2050 where the rules will change almost every time.

Go back thirty years and no one would have been talking of SIPPS, drawdown, LISAs etc etc.  It was all talk of annuities and pension changes over that time have been significant, the next 30 years won't be any different.

Just concentrate on saving as much as possible in the most tax efficient way.

german_keeper

Young_worker said:

@german_keeper As far as I can see from stories online and the TPS website - as she joined the TPS in September 2015 (i.e. after career average introduced) she won't be impacted by the McCloud judgement? Or am i missing something?

Apologies,missed that. What was it teachers used to say about exams, make sure you read the question!!

Young_worker

Does anybody know if contributions via AVCs to prudential are made via salary sacrifice? Would put another spin on things if we could make the NI savings as well. Thank you

GunJack

kinger101 said:

GunJack said:

kinger101 said:

GunJack said:

She may be better opening a SIPP or other private pension rather than S&SISA - you could be invested in the same things, but get the 20% tax relief added when the contributions are made, and so they get more time to compound. This would build up, effectively, a DC pot which could bridge the gap between retiring early (and living off the SIPP/PP) so you don't have to take the TPS early and therefore avoid the actuarial reduction that would be applied (yes, to the Post-2015 career average TPS as well as the older final salary one). 30+/57ths of career average TPS by 58, still grows in deferrement by (CPI? RPI? I don't know, but it doesn't stand still), and would be better to leave until scheme retirement age if possible.

The SIPP isn't that tax efficient for BR taxpayers aged below 40.  You might get "20% tax relief" going in, but it's just tax deferment.  The pension will be taxable at marginal rate on exit.  Given the 25% tax free, that means 15% rather than 20%.  So for every 80 p of net salary in, 85 p of net pension comes out.  An uplift of 6.25%.  LISA on the other hand gives one a 25% uplift.

Likewise if TPS is a salary sacrifice scheme (I've no idea), additional contributions get this get a 25 % uplift, as the 85 p net pension costs only 68 p once as NI is also saved (100 p - 20 p income tax, - 12 p national insurance = 68 p).

I'd do cost/benefit analysis of the TPS AVC vs LISA.   

but you're assuming that ALL of the SIPP income is taken at 20% tax - if this is the only income (having retired early) then they'd get the 25% TFLS, plus the first £12.5k pa tax free (personal allowance)....you could end up paying very little if any tax on the SIPP over 10 years.....

They plan to retire early, so there is scope for tax-free drawdown of SIPP between occupation pension being drawn on along the lines of BishopsBrennan's post.  But once occupational pension is drawn (and definitely state pension), then pension will be taxed at marginal rate.  This is the tax rate applied to that slice of income.   
Even for someone with just state pension and a DC scheme, state pension will swallow up about 75% of the personal allowance straight away.   

however, the SIPP/PP could be totally emptied by the time SP & TPS starts, leaving no tax on the DC pension...even on a pot of £200k  to cover 10yrs between retirement & SP/TPS, they'd only end up paying a small amount of tax.. 

JamoLew

I know the 2015 section of the NHS pension has quite large penalties for each year before retirement age (currently 67) that you take it - in the range of 4-5% last time I looked, make sure you factor that into your calculations.
So taking early retirement @58 would reduce the annual pension by ~ 35%

JCUK

Young_worker said:

Does anybody know if contributions via AVCs to prudential are made via salary sacrifice? Would put another spin on things if we could make the NI savings as well. Thank you

AVCs are not Sal sac. Generally a SIPP is better, as you have more choice and flexibility than the Pru scheme