Forced out of Teacher Pension Scheme - what next?

Cleagarr

I work in the Independent sector and our school cannot take the 5% increase in employer's contributions to the TPS so is suggesting 3 alternatives outlined below. For context, I will be 45 in March, have 22 years service and if I withdraw from the scheme now and leave the money in til 60 the annual pension will be worth £15,000. I currently earn £57,000 and want to retire (or have the option to finish teaching) at 55. I have a mortgage of £200k which will run until I am 62.

1. Opting out of any pension arrangements that are connected with the school and taking the employer’s contribution as salary. That would mean a rise of take home pay of 33%, less tax and NI
2. Doing the same as Option 1 but then opting into a defined contribution pension scheme (most schools are using APTIS, which is the Aviva Pension Trust for independent schools. I believe that APTIS typically works on a 10% employer’s contribution. The remaining 23% would be taken as salary, less tax and NI.
3. The employee stays in TPS but there is a salary adjustment downward that recognises the upward shift from 23% to 28% of the employer’s contribution.

My main question, really, is about option 2. Is it worth doing this - would I acrue enough pension (less any penalties) to make it worthwhile? I guess if I stick to leaving teaching at 55 I would have to leave this pot alone until 57, so is it worth it? 
The reason why I do not think option 3 is suitable is the mortgage - even less the tax and NI I think I could put around £7,000 onto my mortgage a year and pay it off at around 57, which, in itself, is an income 'boost' of £15,000 per year or an expense any pension (or 'bridging income to aged 60) wouldn't need to pay for.


I'm now sure I'm making any sense (and have no idea how to sort the font out!) but any thoughts would be appreciated.

Albermarle

If you want to retire early ( at 55) with a decent income, then you need to keep putting plenty of money away, and a pension is normally the best way to do this.
So this would rule out Option 1.
I presume for Option 2) you would be expected to add a % yourself to get the 10% employer contribution. That is normally how it works with workplace pensions. In fact you do not say if you make any % contribution yourself to the current scheme?

The TPS is a very good scheme but expensive to fund, as you are now aware.
Alternative DC schemes are normally seen as not as good, but a large part of that is because employers put less money into them. Although however much you put in these are no guaranteed benefits, and the end result is dependent on how the investments perform.
However if the same % is going into a DC scheme as goes into a DB scheme you might approx end up with a similar result.
So with Option 2 you would ideally be looking at putting a significant part of the 23% extra salary into the DC pension. Remember you will get tax relief on your contributions, and you can get higher rate tax relief on some of it which is not to be sniffed at.

The mortgage vs pension debate is played out on this forum on a regular basis, but getting higher rate tax relief on part/all  of the pension contributions would swing the argument firmly in favour of this route. Although it does not need to be all or nothing.

Dazed_and_C0nfused

With 2 you really wouldn't be accruing a pension as such.

You would be building up a pot of money for your retirement.  And the choices of how to utilise that in retirement are myriad. 

You could buy an annuity (of which there are a myriad of sub options).

Or drawdown x% per year 

Or take it all out on one go.

And so on.  Personally 3 sounds like it's at least worth considering, albeit a bitter pill to swallow.  Do you know what the adjustment might be?  A straight 5% drop?

Don't forget that on £57k the top slice of your income is currently incurring 40% tax and 2% NI so having to give part of that up isn't a straight lose 5% (or whatever it is) impact.

Even when you drop down below higher rate it's now 20% tax and 10% NI so still softens the blow somewhat.

QrizB

As a very rough guide, to ensure an equivalent pension to the TPS you're going to have to pay intp the new scheme a sum equivalent to the current employer's contribution (the 33%uplift) plus whatever employee contribution you're currently making.

All other things being equal, pension contributions are usually a better option than mortgage overpayments.

Beyond that, it comes down to how your chosen investment strategy pans out over the next 50 years of financial markets.

hugheskevi

Your employer is obligated to put you into a pension under automatic enrolment rules.

I don't see why you couldn't take Option 1 and shortly after everything is organised and the pay increase implemented, request to opt-into the employer's pension arrangements - these may well be just a single Defined Contribution scheme offered under Option 2, but as a minimum you would then get the pay increase as well as statutory minimum pension contributions.

Any contractual clauses requiring you to be opted out of the pension scheme else have a pay reduction are going to be difficult for the employer to defend under inducement to opt-out rules from the Regulator.

westv

If it was me I'd go for option 3. Yes, less paid toward the mortgage but you are adding to guaranteed income for the rest of your life once you start taking it.

Cleagarr

Thanks, all. Really appreciate you taking the time.

The other thing I should add is that my wife is also a teacher (with the same service but 6 years part time due to maternity) and so I was considering a fourth option - AVCs. She also earns 57-58,000, one year younger. A rough calculation on an online site (assuming 3% growth) suggests a lump sum payment of 77,000 (taxed) or yearly 25% lumps (untaxed?) at aged 55 with 11 years of contributions @£380 salary sacrifice. This would allow us somewhat a bridge til we draw our pensions (her at 57 having paid in til 55 - state sector-, me at 60). With the mortgage gone as outlined above that seems doable.

For illustration, if I pay into the TPS at the higher contribution rate (assuming it doesn't go up again) I will get £19,000 per year at 55. If I withdraw now but don't claim it until 60 I will get £15,129.

Bostonerimus1

You could look for another teaching job with TPS.

Cleagarr

Bostonerimus1 said:

You could look for another teaching job with TPS.

Nope. The state sector nearly killed me. And, for other reasons, it isn't practical.

JoeCrystal

Option 3 makes more sense since you are still getting all the benefits of TPS like death in service and ill health retirement.

QrizB

JoeCrystal said:

Option 3 makes more sense since you are still getting all the benefits of TPS like death in service and ill health retirement.

Yes, increasing your employee contributions by 5% of salary to stay in TPS is definitely an option for someone who doesn't want to manage a DC pot.

5% of £57k is £2850. If this would normally be taxed at 40%, you'll be giving up £1700pa / £140pm from your take-home pay.