Teachers Pension Additional Payments, AVCs, SIPP...argh

likesallweather

Hello. I'm here because I'm going around in circles and hoping someone can help or offer their own similar experience or findings.

I have a teachers pension. A small amount in the 80th scheme and rest in career average. I'm 45, always been part time (0.6) — TPS calculate my full time equivalent service to be 11 years.

I'm in a fortunate position — mortgage is clear. I make occasional additional payments into TPS from my company, so saving tax potentially 40%. I'm pretty risk averse.

I have up to 50k in company to invest and I'm trying to find the best option. My instinct is just to pay it all into TPS as a one off additional payment. I have an AVC option too — I've never used that, don't understand the difference 100% other than its value could go down. SIPP sounds similar?

TPS, if I die, seems pretty standard in terms of spouse benefit, 37.5% (not 50% as originally stated) after an initial remainder of 5 years full pension. Kids up to 23 if in full time education. BUT... all the additional payments I've made are just merged into this — there is no option to to take the additional payments back. And if my kids are over 23...nothing.

So, question is, apart from general suggestions around what's above...Is there a pension that I can invest in as company director, or AVC with teachers pension, which would allow any additional payments to be withdrawn or passed to kids, in full, if I die. And child / family pension, not capped at 23. I'm holding back paying more into TPS just incase something happened and there'd be no way of my family getting back what I've paid in.

Kim1965

Career average spousal benefit is 37.5% as ive found out recently. 

likesallweather

Kim1965 said:

Career average spousal benefit is 37.5% as ive found out recently. 

yes, my mistake — I had thought it was 50%. So any additional payments I make between now and whenever, would be at the risk of never seeing family, in full at least.

Universidad

It's a balancing act, about managing risk.

There are very few ways to reduce overall risk as comprehensively as with a public sector defined benefit pension. Whatever your pension is worth today, it will be worth the same, in real terms give or take, when you retire. 

There is nothing more expensive than certainty. 

For what they offer, DB pensions are excellent value. If you think of it as a kind of insurance against being poor in old age it may seem better value. You're not paying to get your money back and then some on top. You're paying to never worry about running out of money in old age.

AVCs, and other Defined Contribution schemes, are traditional investments, but the pension wrapper provides good tax efficiency that is not available in most other investment contexts. They can peform well or badly, depending on what they're invested in. When it comes time to take your money out, there is only as much as there is, although obviously whatever's in your pot keeps changing in value for as long as it is invested. 

For a lot of people with DB pensions, once their accrued annual pension is high enough to retire on, the balance of risk shifts slightly. At that point folks might start thinking about what kind of investment might allow them to retire better, or earlier.

And at that point also having some money in AVCs or a SIPP offers something DB pensions alone don't have a lot of: flexibility. 

One common strategy is to use a DC pot not to last for the rest of ones life, but to bridge the gap between an early retirement and the state pension age. You still can't plan for how your investments will perform, and whether they'll line up well with an early retirement - but you do take one factor out of the equation, which is how long you'll need the money for. If you choose to retire at 60, you know (with reasonable confidence) that you have ~8 years until your state pension kicks in.

Doctor_Who

Universidad said:

It's a balancing act, about managing risk.

There are very few ways to reduce overall risk as comprehensively as with a public sector defined benefit pension. Whatever your pension is worth today, it will be worth the same, in real terms give or take, when you retire. 

There is nothing more expensive than certainty. 

For what they offer, DB pensions are excellent value. If you think of it as a kind of insurance against being poor in old age it may seem better value. You're not paying to get your money back and then some on top. You're paying to never worry about running out of money in old age.

AVCs, and other Defined Contribution schemes, are traditional investments, but the pension wrapper provides good tax efficiency that is not available in most other investment contexts. They can peform well or badly, depending on what they're invested in. When it comes time to take your money out, there is only as much as there is, although obviously whatever's in your pot keeps changing in value for as long as it is invested. 

For a lot of people with DB pensions, once their accrued annual pension is high enough to retire on, the balance of risk shifts slightly. At that point folks might start thinking about what kind of investment might allow them to retire better, or earlier.

And at that point also having some money in AVCs or a SIPP offers something DB pensions alone don't have a lot of: flexibility. 

One common strategy is to use a DB pot not to last for the rest of ones life, but to bridge the gap between an early retirement and the state pension age. You still can't plan for how your investments will perform, and whether they'll line up well with an early retirement - but you do take one factor out of the equation, which is how long you'll need the money for. If you choose to retire at 60, you know (with reasonable confidence) that you have ~8 years until your state pension kicks in.

I think you mean 'DC pot'. I'm using part of my SIPP to fund the gap between early retirement and DB pension starting at 65.

Albermarle

I have up to 50k in company to invest and I'm trying to find the best option. My instinct is just to pay it all into TPS as a one off additional payment. I have an AVC option too — I've never used that, don't understand the difference 100% other than its value could go down. SIPP sounds similar?

Just for clarity. There are two basic types of pension.

Defined Benefit ( DB ) - Like the TPS- a guaranteed pension based on your length of service and salary. although the details of the calculation can vary.  Mainly only available nowadays in the Public Sector as they are expensive to fund.

Defined Contribution ( DC) - An investment account with tax benefits, but a restriction on how old you have to be to access the accumulated pot. No guarantee of pension income. A lot depends on how much you/your employer add to it and the investment performance.

There are different types of DC pensions ( SIPP's, AVC's, personal pensions etc ) but they are all basically similar.

Caveat is that some AVC pots linked to a DB pension can bring some extra benefits when taking the pension ( more tax free cash ) . I do not know if this applies to the TPS .

Universidad

Doctor_Who said:

Universidad said:

One common strategy is to use a DB pot not to last for the rest of ones life, but to bridge the gap between an early retirement and the state pension age.

I think you mean 'DC pot'. I'm using part of my SIPP to fund the gap between early retirement and DB pension starting at 65.

I definitely do, corrected in edit - thanks.

likesallweather

Thanks everyone, very useful information.

So it's worthwhile having another pension alongside the teachers pension?

I hadn't considered using DC to bridge early retirement. I was thinking how much the 25% lump sum and early retirement would reduce my Teachers Pension, so this makes total sense...assuming what's paid into a DC pot doesn't plummet!

There is an AVC attached to TPS, through Prudential, but maybe I'd be better finding a SIPP using my other role as company director? No idea where to start looking for those/that though, so any pointers also gratefully received!

Dazed_and_C0nfused

likesallweather said:

Thanks everyone, very useful information.

So it's worthwhile having another pension alongside the teachers pension?

I hadn't considered using DC to bridge early retirement. I was thinking how much the 25% lump sum and early retirement would reduce my Teachers Pension, so this makes total sense...assuming what's paid into a DC pot doesn't plummet!

There is an AVC attached to TPS, through Prudential, but maybe I'd be better finding a SIPP using my other role as company director? No idea where to start looking for those/that though, so any pointers also gratefully received!

There is no 25% TFLS with the Teachers Pension scheme.

The old scheme had a PCLS based on the scheme rules.  Possibly 3x annual pension.

The new scheme has no standard PCLS.  But you can take one if you are happy giving up some of your pension.

Chances are it will be a terrible option from a financial perspective, probably just £12 for each £1 of pension you give up. 

And that £1 that would have been increased by the annual revaluation for the rest of your life if it was still part of your the pension.

https://www.teacherspensions.co.uk/members/faqs.aspx?page=5&searchTerm=Care

likesallweather

^^ yes you're right, it's 3x annual pension...So £12 for every £1 I give up...excuse my naivety...does that mean that every year of my pension I'd surrender £1 in exchange for £12 upfront? So after 12 years I would be losing?


So, am I correct in thinking a decent plan (not looking for advice, just a nod or a shake) for the next few years would be to pile in, as quickly as I can, the max extra cash I can pay into the TPS (90k total I think for £7.5 extra pension). Then pay into a SIPP. Retire early using the SIPP & it's 25% tax free lump sum before TPS kicks in at 67ish and state pension shortly after?!

Dazed_and_C0nfused said:

likesallweather said:

Thanks everyone, very useful information.

So it's worthwhile having another pension alongside the teachers pension?

I hadn't considered using DC to bridge early retirement. I was thinking how much the 25% lump sum and early retirement would reduce my Teachers Pension, so this makes total sense...assuming what's paid into a DC pot doesn't plummet!

There is an AVC attached to TPS, through Prudential, but maybe I'd be better finding a SIPP using my other role as company director? No idea where to start looking for those/that though, so any pointers also gratefully received!

There is no 25% TFLS with the Teachers Pension scheme.

The old scheme had a PCLS based on the scheme rules.  Possibly 3x annual pension.

The new scheme has no standard PCLS.  But you can take one if you are happy giving up some of your pension.

Chances are it will be a terrible option from a financial perspective, probably just £12 for each £1 of pension you give up. 

And that £1 that would have been increased by the annual revaluation for the rest of your life if it was still part of your the pension.

https://www.teacherspensions.co.uk/members/faqs.aspx?page=5&searchTerm=Care

Universidad

likesallweather said:

So it's worthwhile having another pension alongside the teachers pension?

I hadn't considered using DC to bridge early retirement. I was thinking how much the 25% lump sum and early retirement would reduce my Teachers Pension,

Whether it's worthwhile is up to you, but it does offer some flexibility. 

When it comes to early retirement plans, a DC pot isn't the only game in town: paying more into a DB pension with the intention of having an earlier retirement is a totally valid plan.

The amount of DB pension you get each year will be lower if you take it early - but that's because it will be paid out for longer. The question with a DB pension being taken early is generally not "am i losing out?", it's "is this enough to live on?" If you have a full state pension, though, retiring with a DB pension early probably leads to being richer in your 70s than your 60s, which for many people is the wrong way around!

On the other hand, you could have a DC pot, a state pension, and a DB pension all in play together, and you can choose to retire in a variety of ways depending on how the DC pot performs as you get closer to retirement age.

One option for example would be to retire early with your DB pension, accepting that it will be actuarially reduced, use the DC pension to provide an income equivalent to the state pension, and then stop drawing it when you reach state pension age, leaving you with a relatively smooth income over your lifetime.

This does assume nobody messes with the state pension before you claim it, of course, but you should know closer to the time what's going down there.