Optimising Teachers pension

Lbstyling_2

Hello all,

- Age 38
- Teaching 8 years
- Earning in 40% tax bracket.

I was given a cash lump sum (80K after tax) last year I was going to invest, but figure it may make more sense to use this to live on, (rather than my wages) and instead overpay my wages as you do not pay tax on pension payments?

The teachers pension system is not clear to me about how to overpay. It uses different terms all over the place for different things and things change due to age, final salary systems etc. 

-How to overpay in order to retire as early as possible.
-When that would be.
-How to increase the amount I receive in retirement each year/month.
-How much can I overpay by.

Where do I click on the 'teacherspension' online to do this?

I have the option of:

-Additional pension'
-Buyout
-Faster Accrual

Can anyone suggest how I do this?

Thanks

RobfromCornwall

I had the sam questions as you a while back and couldn't get my head around the answers.  From what I could figure out, the system seemed limiting and clunky.  

Went down the SIPP route instead.  Much more flexible.

Dazed_and_C0nfused

RobfromCornwall said:

I had the sam questions as you a while back and couldn't get my head around the answers.  From what I could figure out, the system seemed limiting and clunky.  

Went down the SIPP route instead.  Much more flexible.

But a completely different beast to a DB pension.

Flexibility will be good for some but not what others are interested in.

collins74

I would be interested to hear views on this. 

 My wife is in the TPS and I find it difficult to understand in many ways (I am in LGPS which is fantastic in terms of planning tools and literature).  

My wife pays into an AVC as we want a lump sum at retirement as we have limited cash savings (we are willing to pay the tax)  I have never really delved further into other top up options so interested to see how this thread develops.  

Thanks  

Kernowshep

Others will be better versed than I am, but other points needed for proper consideration include.

Do you have enough / any other savings and or pensions.
Do you have a mortgage/want to buy or upgrade a home.
Do you have a partner - what's their situation.
What else would/could you use the money for.
Do you think you will keep teaching for the next 20-25 years.
What career progression do you think there be.
Do you have dependants.
What expenditure do you have / how much do you currently save.

From a quick skim of the scheme I think Buyout needs to be done with 6 months of starting.

If you wanted to retire before SPA then considering a standalone SIPP is something else you can think about.

xylophone

Have you seen

Additional Pension?

https://www.teacherspensions.co.uk/members/working-life/paying-in/increasing-your-pension/additional-pension.aspx

Buyout?

https://www.teacherspensions.co.uk/members/working-life/paying-in/increasing-your-pension/buy-out-of-the-standard-actuarial-adjustment.aspx

Faster Accrual

https://www.teacherspensions.co.uk/members/working-life/paying-in/increasing-your-pension/faster-accrual.aspx#:~:text=Faster accrual gives you the,only applies for one year.

Or the DC AVC option

https://www.teacherspensions.co.uk/members/faqs/working-life/additional-voluntary-contributions.aspx

For some more guidance

https://www.wesleyan.co.uk/pensions-and-retirement/teachers-pension  might be worth a look through.

hugheskevi

Lbstyling_2 said:

I was given a cash lump sum (80K after tax) last year I was going to invest, but figure it may make more sense to use this to live on, (rather than my wages) and instead overpay my wages as you do not pay tax on pension payments?

Pension contributions are free of income tax, but probably not of National Insurance (they are if employer offers salary sacrifice, but your employer probably does not).

Lbstyling_2 said:

The teachers pension system is not clear to me about how to overpay. It uses different terms all over the place for different things and things change due to age, final salary systems etc. 

-How to overpay in order to retire as early as possible.
-When that would be.
-How to increase the amount I receive in retirement each year/month.
-How much can I overpay by.

The key things you need to know are what age do you wish to retire at, and what amount of expenditure do you want in retirement? Your normal minimum pension age is 57 (although prudent to assume it will at least 58), but you may have a protected age in your scheme to retire earlier. Your normal pension age will be 68 and could increase if the State Pension increases.

Once you know those figures, work out what private and State pension you have, and draw up a plan as to how best to make up the remainder, taking into account normal Teacher Pension accrual, using Additional Pension, Buyout or Faster Accrual, and/or using Defined Contribution saving.

Additional Pension is easy to understand - you pay a specified amount in return for a specified amount of pension. Faster Accrual will be better if you plan to remain in the scheme for a long time, as then it benefits from the enhanced in-service revaluation. If you think you might leave the scheme soon then it wouldn't be so good. Defined Contribution is completely different, but benefits from tax relief and its flexibility will almost certainly be useful at some point, probably around funding any period prior to State Pension age if you reitre before that age. You can make Defined Contribution savings from any employment, but realistically Defined Benefit pension will only be available to you when you are working in the public sector, so something to consider if you think leaving the public sector might happen.

Given your age, opening a Lifetime ISA with a de minimis amount is probably sensible. It isn't better than pension saving given you are a higher rate taxpayer, but if you have opened one you can contribute between age 40-50 and things might change in the future to make that a good thing to do so by opening one you keep those options open.

RobfromCornwall said:

I had the sam questions as you a while back and couldn't get my head around the answers.  From what I could figure out, the system seemed limiting and clunky.  

Went down the SIPP route instead.  Much more flexible.

Defined Benefit and Defined Contribution pensions are almost polar opposites. The strengths of each are usually the weakness of the other one. For example, Defined Benefit schemes offer guaranteed income for life, whereas Defined Contribution offers complete flexibility about how to use the fund. DB has poor inheritability and survivor benefits, DC has great inheritability and survivors inherit 100% of the pot. DC offers lots of scope to optimise the use of tax allowances, DB has little flexibility and often doesn't have a tax-free lump sum in all but name due to the commutation factors used.

Often a combination of both DB and DC is best, but exactly what that balance might be may be difficult to work out for an individual.

collins74 said:

My wife is in the TPS and I find it difficult to understand in many ways (I am in LGPS which is fantastic in terms of planning tools and literature).  

My wife pays into an AVC as we want a lump sum at retirement as we have limited cash savings (we are willing to pay the tax)  I have never really delved further into other top up options so interested to see how this thread develops.  

If you are in the LGPS and so can take AVCs tax-free as part of the main scheme pension, wouldn't it be better for you to make the AVC contributions rather than your wife who can't do that in the Teachers' scheme?

Lbstyling_2

hugheskevi said:

Lbstyling_2 said:

I was given a cash lump sum (80K after tax) last year I was going to invest, but figure it may make more sense to use this to live on, (rather than my wages) and instead overpay my wages as you do not pay tax on pension payments?

Pension contributions are free of income tax, but probably not of National Insurance (they are if employer offers salary sacrifice, but your employer probably does not).

Lbstyling_2 said:

The teachers pension system is not clear to me about how to overpay. It uses different terms all over the place for different things and things change due to age, final salary systems etc. 

-How to overpay in order to retire as early as possible.
-When that would be.
-How to increase the amount I receive in retirement each year/month.
-How much can I overpay by.

The key things you need to know are what age do you wish to retire at, and what amount of expenditure do you want in retirement? Your normal minimum pension age is 57 (although prudent to assume it will at least 58), but you may have a protected age in your scheme to retire earlier. Your normal pension age will be 68 and could increase if the State Pension increases.

Once you know those figures, work out what private and State pension you have, and draw up a plan as to how best to make up the remainder, taking into account normal Teacher Pension accrual, using Additional Pension, Buyout or Faster Accrual, and/or using Defined Contribution saving.

Additional Pension is easy to understand - you pay a specified amount in return for a specified amount of pension. Faster Accrual will be better if you plan to remain in the scheme for a long time, as then it benefits from the enhanced in-service revaluation. If you think you might leave the scheme soon then it wouldn't be so good. Defined Contribution is completely different, but benefits from tax relief and its flexibility will almost certainly be useful at some point, probably around funding any period prior to State Pension age if you reitre before that age. You can make Defined Contribution savings from any employment, but realistically Defined Benefit pension will only be available to you when you are working in the public sector, so something to consider if you think leaving the public sector might happen.

Given your age, opening a Lifetime ISA with a de minimis amount is probably sensible. It isn't better than pension saving given you are a higher rate taxpayer, but if you have opened one you can contribute between age 40-50 and things might change in the future to make that a good thing to do so by opening one you keep those options open

-Opening LISA as I type. Thanks for the tip!
-I'm 38.
-Retirement aim is as early as possible, I think this is 57 for me. 
-Stocks and Shares ISA opened with a small amount in (for fun really)

-Teachers pension online indicates I can purchase a maximum £8500 a year of pension for a lump sum of £84000 if I have read it correctly. Perhaps I have misunderstood, but this isn't a great rate of return on the face of it?

-Applied for 'flexibility' at the fastest rate available 1/45 for this year. I need to apply for this each year apparently.

AAB buyout makes no sense to me, as it tells me the dates don't work when I complete the online application form. Perhaps this is because: 

'If your new NPA is 66 you’ll be able to Buy Out one year’s actuarial adjustment, whereas if your new NPA is 67 you’ll be able to Buy Out two years and if your NPA is 68 you’ll be able to Buy Out three years actuarial adjustment.

You only have one opportunity to ‘Buy Out’ the reduction and this must be done within six months of you first entering career average. Contributions towards the Buy Out option last throughout your career, unless you decide to revoke your election.'

If I have read this correctly, I cant have AAB buyout unless I got it in the first 6 months of teaching?

hugheskevi

Lbstyling_2 said:

hugheskevi said:

Lbstyling_2 said:

I was given a cash lump sum (80K after tax) last year I was going to invest, but figure it may make more sense to use this to live on, (rather than my wages) and instead overpay my wages as you do not pay tax on pension payments?

Pension contributions are free of income tax, but probably not of National Insurance (they are if employer offers salary sacrifice, but your employer probably does not).

Lbstyling_2 said:

The teachers pension system is not clear to me about how to overpay. It uses different terms all over the place for different things and things change due to age, final salary systems etc. 

-How to overpay in order to retire as early as possible.
-When that would be.
-How to increase the amount I receive in retirement each year/month.
-How much can I overpay by.

The key things you need to know are what age do you wish to retire at, and what amount of expenditure do you want in retirement? Your normal minimum pension age is 57 (although prudent to assume it will at least 58), but you may have a protected age in your scheme to retire earlier. Your normal pension age will be 68 and could increase if the State Pension increases.

Once you know those figures, work out what private and State pension you have, and draw up a plan as to how best to make up the remainder, taking into account normal Teacher Pension accrual, using Additional Pension, Buyout or Faster Accrual, and/or using Defined Contribution saving.

Additional Pension is easy to understand - you pay a specified amount in return for a specified amount of pension. Faster Accrual will be better if you plan to remain in the scheme for a long time, as then it benefits from the enhanced in-service revaluation. If you think you might leave the scheme soon then it wouldn't be so good. Defined Contribution is completely different, but benefits from tax relief and its flexibility will almost certainly be useful at some point, probably around funding any period prior to State Pension age if you reitre before that age. You can make Defined Contribution savings from any employment, but realistically Defined Benefit pension will only be available to you when you are working in the public sector, so something to consider if you think leaving the public sector might happen.

Given your age, opening a Lifetime ISA with a de minimis amount is probably sensible. It isn't better than pension saving given you are a higher rate taxpayer, but if you have opened one you can contribute between age 40-50 and things might change in the future to make that a good thing to do so by opening one you keep those options open.

RobfromCornwall said:

I had the sam questions as you a while back and couldn't get my head around the answers.  From what I could figure out, the system seemed limiting and clunky.  

Went down the SIPP route instead.  Much more flexible.

Defined Benefit and Defined Contribution pensions are almost polar opposites. The strengths of each are usually the weakness of the other one. For example, Defined Benefit schemes offer guaranteed income for life, whereas Defined Contribution offers complete flexibility about how to use the fund. DB has poor inheritability and survivor benefits, DC has great inheritability and survivors inherit 100% of the pot. DC offers lots of scope to optimise the use of tax allowances, DB has little flexibility and often doesn't have a tax-free lump sum in all but name due to the commutation factors used.

Often a combination of both DB and DC is best, but exactly what that balance might be may be difficult to work out for an individual.

collins74 said:

My wife is in the TPS and I find it difficult to understand in many ways (I am in LGPS which is fantastic in terms of planning tools and literature).  

My wife pays into an AVC as we want a lump sum at retirement as we have limited cash savings (we are willing to pay the tax)  I have never really delved further into other top up options so interested to see how this thread develops.  

If you are in the LGPS and so can take AVCs tax-free as part of the main scheme pension, wouldn't it be better for you to make the AVC contributions rather than your wife who can't do that in the Teachers' scheme?

Teachers pension online indicates I can purchase a maximum £8500 a year of pension for a lump sum of £84000 if I have read it correctly. Perhaps I have misunderstood, but this isn't a great rate of return.

Sounds about right - all the options are calculated using a discount rate of CPI+1.7%, which you can think of as the rate of return after charges for a member who is average in all regards (eg life expectancy, having a partner, etc). Depending on individual characteristics, the return may be higher or lower.

Dazed_and_C0nfused

hugheskevi said:

Lbstyling_2 said:

hugheskevi said:

Lbstyling_2 said:

I was given a cash lump sum (80K after tax) last year I was going to invest, but figure it may make more sense to use this to live on, (rather than my wages) and instead overpay my wages as you do not pay tax on pension payments?

Pension contributions are free of income tax, but probably not of National Insurance (they are if employer offers salary sacrifice, but your employer probably does not).

Lbstyling_2 said:

The teachers pension system is not clear to me about how to overpay. It uses different terms all over the place for different things and things change due to age, final salary systems etc. 

-How to overpay in order to retire as early as possible.
-When that would be.
-How to increase the amount I receive in retirement each year/month.
-How much can I overpay by.

The key things you need to know are what age do you wish to retire at, and what amount of expenditure do you want in retirement? Your normal minimum pension age is 57 (although prudent to assume it will at least 58), but you may have a protected age in your scheme to retire earlier. Your normal pension age will be 68 and could increase if the State Pension increases.

Once you know those figures, work out what private and State pension you have, and draw up a plan as to how best to make up the remainder, taking into account normal Teacher Pension accrual, using Additional Pension, Buyout or Faster Accrual, and/or using Defined Contribution saving.

Additional Pension is easy to understand - you pay a specified amount in return for a specified amount of pension. Faster Accrual will be better if you plan to remain in the scheme for a long time, as then it benefits from the enhanced in-service revaluation. If you think you might leave the scheme soon then it wouldn't be so good. Defined Contribution is completely different, but benefits from tax relief and its flexibility will almost certainly be useful at some point, probably around funding any period prior to State Pension age if you reitre before that age. You can make Defined Contribution savings from any employment, but realistically Defined Benefit pension will only be available to you when you are working in the public sector, so something to consider if you think leaving the public sector might happen.

Given your age, opening a Lifetime ISA with a de minimis amount is probably sensible. It isn't better than pension saving given you are a higher rate taxpayer, but if you have opened one you can contribute between age 40-50 and things might change in the future to make that a good thing to do so by opening one you keep those options open.

RobfromCornwall said:

I had the sam questions as you a while back and couldn't get my head around the answers.  From what I could figure out, the system seemed limiting and clunky.  

Went down the SIPP route instead.  Much more flexible.

Defined Benefit and Defined Contribution pensions are almost polar opposites. The strengths of each are usually the weakness of the other one. For example, Defined Benefit schemes offer guaranteed income for life, whereas Defined Contribution offers complete flexibility about how to use the fund. DB has poor inheritability and survivor benefits, DC has great inheritability and survivors inherit 100% of the pot. DC offers lots of scope to optimise the use of tax allowances, DB has little flexibility and often doesn't have a tax-free lump sum in all but name due to the commutation factors used.

Often a combination of both DB and DC is best, but exactly what that balance might be may be difficult to work out for an individual.

collins74 said:

My wife is in the TPS and I find it difficult to understand in many ways (I am in LGPS which is fantastic in terms of planning tools and literature).  

My wife pays into an AVC as we want a lump sum at retirement as we have limited cash savings (we are willing to pay the tax)  I have never really delved further into other top up options so interested to see how this thread develops.  

If you are in the LGPS and so can take AVCs tax-free as part of the main scheme pension, wouldn't it be better for you to make the AVC contributions rather than your wife who can't do that in the Teachers' scheme?

Teachers pension online indicates I can purchase a maximum £8500 a year of pension for a lump sum of £84000 if I have read it correctly. Perhaps I have misunderstood, but this isn't a great rate of return.

Sounds about right - all the options are calculated using a discount rate of CPI+1.7%, which you can think of as the rate of return after charges for a member who is average in all regards (eg life expectancy, having a partner, etc). Depending on individual characteristics, the return may be higher or lower.

Although does the tax relief on the £84,000 (if purchased across multiple tax years) and annual revaluation not make it significantly more attractive?

With the big downside being the NPA.

hugheskevi

Dazed_and_C0nfused said:

hugheskevi said:

Lbstyling_2 said:

hugheskevi said:

Lbstyling_2 said:

I was given a cash lump sum (80K after tax) last year I was going to invest, but figure it may make more sense to use this to live on, (rather than my wages) and instead overpay my wages as you do not pay tax on pension payments?

Pension contributions are free of income tax, but probably not of National Insurance (they are if employer offers salary sacrifice, but your employer probably does not).

Lbstyling_2 said:

The teachers pension system is not clear to me about how to overpay. It uses different terms all over the place for different things and things change due to age, final salary systems etc. 

-How to overpay in order to retire as early as possible.
-When that would be.
-How to increase the amount I receive in retirement each year/month.
-How much can I overpay by.

The key things you need to know are what age do you wish to retire at, and what amount of expenditure do you want in retirement? Your normal minimum pension age is 57 (although prudent to assume it will at least 58), but you may have a protected age in your scheme to retire earlier. Your normal pension age will be 68 and could increase if the State Pension increases.

Once you know those figures, work out what private and State pension you have, and draw up a plan as to how best to make up the remainder, taking into account normal Teacher Pension accrual, using Additional Pension, Buyout or Faster Accrual, and/or using Defined Contribution saving.

Additional Pension is easy to understand - you pay a specified amount in return for a specified amount of pension. Faster Accrual will be better if you plan to remain in the scheme for a long time, as then it benefits from the enhanced in-service revaluation. If you think you might leave the scheme soon then it wouldn't be so good. Defined Contribution is completely different, but benefits from tax relief and its flexibility will almost certainly be useful at some point, probably around funding any period prior to State Pension age if you reitre before that age. You can make Defined Contribution savings from any employment, but realistically Defined Benefit pension will only be available to you when you are working in the public sector, so something to consider if you think leaving the public sector might happen.

Given your age, opening a Lifetime ISA with a de minimis amount is probably sensible. It isn't better than pension saving given you are a higher rate taxpayer, but if you have opened one you can contribute between age 40-50 and things might change in the future to make that a good thing to do so by opening one you keep those options open.

RobfromCornwall said:

I had the sam questions as you a while back and couldn't get my head around the answers.  From what I could figure out, the system seemed limiting and clunky.  

Went down the SIPP route instead.  Much more flexible.

Defined Benefit and Defined Contribution pensions are almost polar opposites. The strengths of each are usually the weakness of the other one. For example, Defined Benefit schemes offer guaranteed income for life, whereas Defined Contribution offers complete flexibility about how to use the fund. DB has poor inheritability and survivor benefits, DC has great inheritability and survivors inherit 100% of the pot. DC offers lots of scope to optimise the use of tax allowances, DB has little flexibility and often doesn't have a tax-free lump sum in all but name due to the commutation factors used.

Often a combination of both DB and DC is best, but exactly what that balance might be may be difficult to work out for an individual.

collins74 said:

My wife is in the TPS and I find it difficult to understand in many ways (I am in LGPS which is fantastic in terms of planning tools and literature).  

My wife pays into an AVC as we want a lump sum at retirement as we have limited cash savings (we are willing to pay the tax)  I have never really delved further into other top up options so interested to see how this thread develops.  

If you are in the LGPS and so can take AVCs tax-free as part of the main scheme pension, wouldn't it be better for you to make the AVC contributions rather than your wife who can't do that in the Teachers' scheme?

Teachers pension online indicates I can purchase a maximum £8500 a year of pension for a lump sum of £84000 if I have read it correctly. Perhaps I have misunderstood, but this isn't a great rate of return.

Sounds about right - all the options are calculated using a discount rate of CPI+1.7%, which you can think of as the rate of return after charges for a member who is average in all regards (eg life expectancy, having a partner, etc). Depending on individual characteristics, the return may be higher or lower.

Although does the tax relief on the £84,000 (if purchased across multiple tax years) and annual revaluation not make it significantly more attractive?

With the big downside being the NPA.

Tax relief benefit depends on the comparator:

• Compared to Defined Contribution, the contributions will be treated the same (assuming the comparator is not salary sacrifice) but when drawn the DC pot will usually benefit from more tax relief than the DB pension due to the poor commutation rate. So for a pure profit-maximisation DC should win-out over voluntary contributions to the DB scheme, but an individual may value the certainty provided by public sector Defined Benefit pension - especially close to retirement when there would be a smaller number of years in which to invest DC pension.
• Compared to other DB AVC options tax relief should all be neutral
• Compared to LISAs the DB tax relief should be a bit better where the contributor is a higher-rate taxpayer (although the rate of tax due when paid will not be known for a long-time)
• Compared to SSISAs the tax relief will be a big benefit 

The annual revaluation is taken into account in the purchase rates, although there may well be a benefit for the individual from not having to bear inflation risk which is greater than the price they pay for it (as individuals are probably more risk-averse than large entities such as the Exchequer).

NPA is the big drawback of a pension for those looking to retire before 57/58, for which SSISAs is often the obvious alternative, although use of a mortgage (repaid by pension in future) can be a great solution if suitable for an individual.

Perhaps a bit more controversial, but I'd also argue that policy change risk is a drawback that should be considered, given that in fairly recent years there have been changes to when a pension can be commenced (Minimum Pension age) and also to the rate at which it increases (RPI/CPI), and for things like Faster Accrual and Additional Pension the member is also exposed to changes in State Pension age, which in the last couple of reviews have been heavily influenced by what the Govt. thinks is an appropriate percentage of life that people should spend above State Pension age, rather than by changes in longevity.