TPS and NEST Pension REAL COST of changing?

Moneybox

Thankyou for reading;
Really confused by pensions, but have had the fortune of being in a TPS pension for 25 Years and on a salary currently of £54,000.
Looking at a change of employment and a salary of £49,700

The NEST employer contribution is set at 15% whilst the TPS I think was 23%.

How do I start calculating the real cost of changing employment?
I can understand the impact on my current living but unsure how to start considering the loss during pension years.

Can any one help steer me in the right direction to estimate some rough figures please?
Ultimately I would want to increase my contribution to the NEST pension to cover the 8% deduction in employers contribution so I end up with roughly the same value of pension.

JoeCrystal

It is not that straightforward. You are comparing apples and oranges basically. It is assumed that your TPS is considered as a third of your salary. Also, you also lose a 1.6% increase above inflation every year on your pension since you would not longer be an active member. Just out of interest, how far are you from Normal Pension Age for TPS btw (in terms of years)? It should be pretty straightforward to work out how much you would lose in term of annual pension once you leave TPS rather than remaining in it.

I can work out how much it takes to build up the DC amount and do two options in which you either drawdown on it or goes for an index-linked annuity (far more expensive options)

Albermarle

It is not just the contribution level - they are different types of pension .
The TPS is a defined benefit scheme - so each year you work you build up a right to a certain amount of guaranteed pension income when you retire .
NEST is a defined contribution scheme where you build up a pot of money that is invested and then when you retire you use that pot of money to provide an income .
In general DB schemes are far superior and much more expensive for the employer to fund .
So there is no guarantee at all that adding another 8% will bring you back to the same level. It might and it might not depending partly on how well the investments in the Nest scheme perform .

On the other hand an employer contribution of 15% is very high compared to the legal minimum of 3% that many employers offer .

Moneybox

46 Years old.
Thankyou Joe. I just need some rough ideas as to if this is financially a bad decision. I have some time to decide but probably not long enough to arrange a financial advisor visit.

JoeCrystal

Thanks, Moneybox. So your NPA is 67 so let say, for example, you are willing to stay in TPS until 67 (a brave teacher!) on the same pay of £54k (to keep it straightforward) for the next 20 years (assuming the scheme stays the same which is unlikely!)

Since you are getting a 1.6% increase on top of inflation every year, you are basically giving up a £22,115 index-linked pension per year in today's money (not including any of your old pension).

Not to worry, if you want to do a drawdown, then you need a pension pot of £552,875 in today money to assume a 4% safe withdrawal rate or £825,000 pension pot if you decide to get an index-linked annuity. To meet the £552,875 target in today's term in two decades, then you need to contribute £1,567.50 every month, which work out the same as 33% really. So do you fancy contribute enough and including the employer's contribution at 38% of your salary?

That 10.2% contribution you are making at £475 per month into TPS is a bargain! So bit a double whammy really, a salary cut AND an increase in your pension contribution if you want to maintain the TPS style in a DC pension scheme.

Of course, all risk rest solely with you and hopefully, the markets will perform as you hope in DC, but as for TPS, well, HM Treasury will be the one to bear all the risk, and you have no concern or worry at all and get your pension when you apply for it. 

EDIT: That 15% pension contribution is very generous. But then, there is nothing to stop your new employer from slashing that to a minimum of 3% when bad times come.

EDIT2: Plus you also lose 1.6% per year above inflation on your CARE earnings already built up as well so that is also a cost.

Sonatine

Just to add to your thinking on this about your currently accrued pension, the McCloud judgment means that your service to date can be considered as the 1/80ths final salary scheme plus the new career average scheme from 2015 ish, OR could be shifted entirely into the 1/80ths scheme, giving you a pension of (approx) £16875 currently. You get to decide at retirement if you want to do that or not. The 1/80ths scheme has a pension age of 60, not 67/8. From April next year your teachers pension would then definitely accrue in the career average scheme.

In terms of the decision there are really two things to think about. The other job has a lower salary, and the teachers pension scheme, being DB, is much better. So if this is purely a financial decision then it is quite simple, stay in teaching and the TPS.

However, the second thing for you to think about is whether you really want the other job, you applied for it after all, and whether that desire offsets the financial hit. Only you know what your thinking is about your current role and whether you want a change or not, even if you take a hit on your future pension earnings.

I'll mention I have a TPS pension and was being head hunted a couple of years ago. Things were quite attractive, with a higher salary too. I sat down and did the calculations on the hit my pension would take. In this instance the new job was probably more interesting too, but that still wasn't enough to get me to pull out of the TPS.