Forced out of Teacher Pension Scheme - what next?

FIREDreamer

Another vote for option 3 here!

Universidad

I think Option 1 and Option 2 are probably the same option, behind the scenes. It's just about whether you opt in or out. Most of the time when you opt out of a pension scheme the employer keeps their contributions. But perhaps there's no rule that says the employer can't pay an equivalent amount to you on a voluntary basis. Someone well acquainted with pension rules might be able to comment. 

I am aware of some circumstances where senior folks in the University sector who had hit the LTA arranged for the employer contributions to be added to their remuneration package. I don't know whether that would normally be against the rules.

So perhaps that's what is being offered. In which case, your salary stays the same, but you get 10% back (what would have been your contributions), and the school pays you an additional bonus amount of 23% (what would have been theirs). In which case, since you'll want a pension one way or another, the question is really about whether you prefer the school's DC pension, your own choice of DC pension, or the DB pension (and a lower salary).

A DC pension is a pot of money that you can manage. It can go up and down with your investment performance. It doesn't offer guarantees. You could end up with more money than through a DB pension. You could end up with less. You won't know till you die, and then you may not care too much. 

What a Defined Benefit pension offers is a guranteed, safeguarded income. You can be as confident as an uncertain world allows what you will recieve, in real terms, each year in retirement for the rest of your life. That certainty has a lot of value, and is quite expensive to buy on the open market.

The other thing to bear in mind is that if you leave the scheme your TPS pension will go into deferrment. TPS is revalued annually in line with CPI + 1.6%. And that applies to your entire TPS pension. But only for active members.

If you leave the TPS scheme, that will stop. It will from then on only be revalued in line with CPI.

If you calculate how increases to your pension over the remainder of your career will be affected by revaluing at 1.6% above inflation, you may come to the conclusion that the pay cut is worth it, regardless of your feelings about certainty.

Speaking of certainty, while the DB pension provides a guarantee of what you'll get out each year in retirement, a DC pension really only guarantees what will go in. However, there is nothing to stop an employer from changing their contribution level in future years.

With a DB scheme, the contribution level can also change over time, but there the black and white choice for your employer is whether to pay it or not. There is no sense in which they can ramp it down each year for the rest of your career to stay profitable with a DB scheme. Not so much the DC side of things.

A 23% DC contribution will, in the wider context of DC pensions, be seen as an extraordinarily generous employer contribution. That will make it very easy to argue that it should be lowered ("in line with market expectations") and very hard to argue that it should remain.

I won't advise here, but as a man who loves certainty, and has lived through more pension cuts than I care to recall, I know where my own bread is buttered.

Bostonerimus1

FIREDreamer said:

Another vote for option 3 here!

The school says it can't afford the increased contributions, but option 3 assumes the employee can. Where's the union when you need them? That's a bit hyperbolic, but the OP's situation is just another example of how employees have been seeing pension benefits cut for decades now.

Universidad

Cleagarr said:

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

So you are turning your extra pay package into £7000 per year, which to you has a value nominally of £15,000 per year because of how it pays off your mortgage.

So let's just do a little maths to see what Option 3 might look like in practical terms.

On a salary of 54150K, which is your reduced salary (57K - 5%), you will add 950 pounds to your annual pension each year. 

If you expect to live for 16 years after your normal retirement age, i.e. to 84 years old, then that already has a value to you of over £15,000 per year of accruals. (Retiring early will not significantly change that nominal value, because your pension will pay less, but for longer, and should therefore be relatively cost neutral).

This amount will increase each year with inflation for the rest of your life. But also, while you are paying in to the TPS scheme, it will increase each year by 1.6% above inflation.

If we assume that you pay in for another 10 years (till age 55), then the compounding effect of this means that your pension from this year will actually be worth an amount over 1100 per year, by the time you retire, which is worth nearly £18,000 in real terms. (Obviously subsequent years will be revalued by less and less until you finally retire, but you already started above your nominal mortgage value.)

And all of that above is to ignore the fact that each year you remain in TPS, all of your previously earned benefits (in the 2015 CARE scheme) will also be gaining in real terms value by 1.6%  - a thing that stops when you withdraw from TPS. That could be nearly a decade of accruals, depending on how you manage the remedy.

Now my maths may be wrong, and you might live less long, and you might prefer the certainty of paying off your mortgage over the certainty of an inflation protected retirement income - this is not something with a "right" answer.

But from my point of view, the mortgage payments are not likely to work out better financially than continuing to accrue a TPS pension, even at a reduced salary.

Marcon

Cleagarr said:

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.

Are you sure these three options are actually on the table - ie has your school confirmed that (a) they comply with auto-enrolment legislation and (b) confirmed that they can remain a participant in the TPS if they allow staff to cherry pick the destination for their pension contributions?

Cleagarr

Universidad said:

Cleagarr said:

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

So you are turning your extra pay package into £7000 per year, which to you has a value nominally of £15,000 per year because of how it pays off your mortgage.

So let's just do a little maths to see what Option 3 might look like in practical terms.

On a salary of 54150K, which is your reduced salary (57K - 5%), you will add 950 pounds to your annual pension each year. 

If you expect to live for 16 years after your normal retirement age, i.e. to 84 years old, then that already has a value to you of over £15,000 per year of accruals. (Retiring early will not significantly change that nominal value, because your pension will pay less, but for longer, and should therefore be relatively cost neutral).

This amount will increase each year with inflation for the rest of your life. But also, while you are paying in to the TPS scheme, it will increase each year by 1.6% above inflation.

If we assume that you pay in for another 10 years (till age 55), then the compounding effect of this means that your pension from this year will actually be worth an amount over 1100 per year, by the time you retire, which is worth nearly £18,000 in real terms. (Obviously subsequent years will be revalued by less and less until you finally retire, but you already started above your nominal mortgage value.)

And all of that above is to ignore the fact that each year you remain in TPS, all of your previously earned benefits (in the 2015 CARE scheme) will also be gaining in real terms value by 1.6%  - a thing that stops when you withdraw from TPS. That could be nearly a decade of accruals, depending on how you manage the remedy.

Now my maths may be wrong, and you might live less long, and you might prefer the certainty of paying off your mortgage over the certainty of an inflation protected retirement income - this is not something with a "right" answer.

But from my point of view, the mortgage payments are not likely to work out better financially than continuing to accrue a TPS pension, even at a reduced salary.

Hi there, really appreciate you taking the time. I think the 'problem' with the maths here is it doesn't take into account the penalties for retiring early. According to the TPS calculator:

If I work and pay in to 60 I would get £27,600 per year.
Going at 55 means £18,700
Leaving the scheme now is £15,100

All the other benefits aside (noted from other comments with thanks) it seems like that is a lot of money going in for the next ten years for not much benefit. If I use the extra income to pay off the mortgage by age 55 I will have an asset worth around £400,000 which I will sell to buy a smaller property and hopefully habe half the £400,000 left (looking at today's prices.)

The other positive is my wife is in the TPS and will be until finishing. She has 'suffered' from being part time for 6 years so we're exploring ten years of AVCs for her...

QrizB

Cleagarr said:

I think the 'problem' with the maths here is it doesn't take into account the penalties for retiring early. According to the TPS calculator:

• If I work and pay in to 60 I would get £27,600 per year.
• Going at 55 means £18,700
• Leaving the scheme now is £15,100

While TPS isn't an annuity, to buy a 55-year-old an index-linked pension of £3600 per year (the difference due to ten years of future accruals) would cost about £106k per the current best buys here.

If you took the 33% and paid it all into a DC pension, by age 55 you might expect to have £190k plus growth. That would currently buy you £6400 a year.

Of course current annuity rates are higher than they've been for the last decade, and they might fall again. That's one of the risks you take with a DC pension rather than a DB one.

Universidad

Cleagarr said:

I think the 'problem' with the maths here is it doesn't take into account the penalties for retiring early.

With a CARE scheme, there are two main "penalties" for retiring early. The first is that you are paying in to the scheme for fewer years, and therefore accruing a commensurately lower amount of benefits. 

The second is that the amount that you have accrued will be actuarially reduced, to account for the additional time that you are drawing it. Neither of these are strictly penalties;10,000 pounds paid annually over 15 years is worth essentially the same as 15,000 pounds paid annually over 10.

You could imagine facing comparable "penalties" for retiring early with a DC pot - it would be invested for fewer years, and therefore have less chance to grow, but in this case it doesn't seem so much like a thing being done to your pension by a third party.

However, because you have some years in a final salary scheme, there are potentially other more actual penalties to retiring early: with a final salary link in place for your years prior to the CARE scheme, you could end up with a lower payout from the FS portion of your benefits if your salary goes down (which option 3 entails). The impact of this will be more or less significant depending on your approach to the remedy solution.