Teachers' Pension Transitional Protection Remedy Buy Out

likesallweather

I'm trying to work out whether the new TPS Buy Out offer is worth it.  Essentially my retirement age is 67. I can buy out two years allowing me to retire at 65, which would cost £600 a year from now till 65 (19 years). I've no experience of this and wonder if anyone with more knowledge than me could offer their thoughts? Maybe the £600/year would be better elsewhere, or used to max the pension.

cobson

Note that without the buy out you can still retire at 65 (or earlier if desired), The buy out just stops the pension being actuarily reduced for taking it before normal pension age.

Universidad

So some guesswork will be involved here, but correct me if I get anything wildly wrong.

I'm guessing your salary is roughly £35,000.

The normal TPS accrual rate is 1/57

Assuming you never increase your salary and work for 19 years, you will earn about 600 per year, or 11500 pension in that 19 year timeframe. These numbers are all very rounded.

Assuming your retirement age is 68, then if you retire 2 years early you will lose 6% of this, currently.

(The early retirement factors above age 65 in TPS are currently a fixed 3%.)

Therefore you will still take home 0.94x your pension of 11500 which is about 10800. This is where we have to assume how long you will live, but assuming 84 then the difference in retiring at 66 gives you 18 years at 10800 per yar, or about 195K over your life (real terms). 

Interestingly, you'd take home 11500 x 16 years if you retired at 68, or 184K over your lifetime. Add another two years at 11500 to this, for the buyout at 66, and you get 207K.

So get this (and remember the numbers are all very rough).

Retiring at 66 with buyout gives you a total of 207K assuming you live to 84

Retiring at 66 without buyout gives you a total of 195K, assuming you live to 84

And retiring at 68 without buyout gives you a total of 184K, assuming you live to 84.

So the difference between retiring early with or without buyout is only ~12,000, which over 19 years at 600 per year is pretty close to what you put in. But that's entirely because of the generous ERFs for retiring earlier than SPA, but at 65+

And ERFs can change, while this locks it in, so it's not for nothing. Plus it increases with inflation (and slightly above it while you remain an active member).

Meanwhile you have two other options for increasing your TPS pension - you can buy added pension, or you can increase your accrual rate.

I think you can buy Faster Accrual in combination with a Buy Out, so that ALL the pension you accrue can be taken at the earlier age without actuarial reduction. 

Meanwhile buying Additional Pension will come as as separate pension, linked to the SPA, and subject to ERFs if taken earlier.

likesallweather

cobson said:

Note that without the buy out you can still retire at 65 (or earlier if desired), The buy out just stops the pension being actuarily reduced for taking it before normal pension age.

Yes that's correct, I just wondered whether the buy out is worth it. Basically £11.5k to retire two years early, so £11.5k to receive a lot more than that back in pension...but is there something I'm missing, or a reason I should think about not doing this?

Universidad

likesallweather said:

Yes that's correct, I just wondered whether the buy out is worth it. Basically £11.5k to retire two years early, so £11.5k to receive a lot more than that back in pension...but is there something I'm missing, or a reason I should think about not doing this?

See above, but the ERFs for the CARE TPS scheme are currently fixed at 3% for each year above age 65 that you retire early. That means the buy out isn't quite as valuable as it looks on paper.

"For members retiring early from active service, the standard reduction of 3% a year
applies for a maximum of 3 years between age 65 and a member’s normal pension
age. However, members do have the option to pay contributions to buy out the
standard reduction (“buy-out election”) for a period of up to 3 years"

Note that this applies to retiring from active service, so I suspect is not relevant if you've deferred the pension before then.

likesallweather

Universidad said:

So some guesswork will be involved here, but correct me if I get anything wildly wrong.

I'm guessing your salary is roughly £35,000.

The normal TPS accrual rate is 1/57

Assuming you never increase your salary and work for 19 years, you will earn about 600 per year, or 11500 pension in that 19 year timeframe. These numbers are all very rounded.

Assuming your retirement age is 68, then if you retire 2 years early you will lose 6% of this, currently.

(The early retirement factors above age 65 in TPS are currently a fixed 3%.)

Therefore you will still take home 0.94x your pension of 11500 which is about 10800. This is where we have to assume how long you will live, but assuming 84 then the difference in retiring at 66 gives you 18 years at 10800 per yar, or about 195K over your life (real terms). 

Interestingly, you'd take home 11500 x 16 years if you retired at 68, or 184K over your lifetime. Add another two years at 11500 to this, for the buyout at 66, and you get 207K.

So get this (and remember the numbers are all very rough).

Retiring at 66 with buyout gives you a total of 207K assuming you live to 84

Retiring at 66 without buyout gives you a total of 195K, assuming you live to 84

And retiring at 68 without buyout gives you a total of 184K, assuming you live to 84.

So the difference between retiring early with or without buyout is only ~12,000, which over 19 years at 600 per year is pretty close to what you put in. But that's entirely because of the generous ERFs for retiring earlier than SPA, but at 65+

And ERFs can change, while this locks it in, so it's not for nothing. Plus it increases with inflation (and slightly above it while you remain an active member).

Meanwhile you have two other options for increasing your TPS pension - you can buy added pension, or you can increase your accrual rate.

I think you can buy Faster Accrual in combination with a Buy Out, so that ALL the pension you accrue can be taken at the earlier age without actuarial reduction. 

Meanwhile buying Additional Pension will come as as separate pension, linked to the SPA, and subject to ERFs if taken earlier.

this is great, thanks very much. Interesting that there's so little difference. I'm almost at the limit of additional pension, then plan to look at something else to bridge early retirement to drawing the TPS.