Teachers' Pension Scheme: Rollback Choices (Faster Accrual)

flexibilly

Is anyone good enough to offer some analysis? Not financial advice, but observations that might be useful to anyone in the pension schemes impacted by the McCloud and Sargeant cases, and who opted for Faster Accrual (FA) or similar flexibilities. Quite a few of these letters must just have gone out to teachers, and there must be similar ones going out to those in similar pension schemes.

I'm in the Teachers' Pension Scheme (TPS) and did Faster Accrual (FA) at the 1/45 rate for four of the first five years of the "remedy period" 1 April 2015 - 31 March 2022. Last week I got a letter from the TPS with the subject line "Your Rollback Choices":

"
Based on all Faster Accrual elections you made during the remedy period your total pension contributions towards Faster Accrual for the remedy period are £10,696.14

Option 1: Convert to final salary Additional Pension Benefit (APB)

If you select this option: Your Faster Accrual will be converted to 60th Final Salary APB value of £1,311.68

If you elect for final salary [FS] at retirement: The above benefits will be included within your final salary benefits plus indexation

If you elect for career average [CA] at retirement: Your Faster Accrual pension value of £986.68 per annum will be included in the career average calculation plus indexation.

Option 2: Refund as Compensation

If you select this option: You'll receive a one-off compensation payment of £10,821.19

Your remedy period Faster Accrual flexibility elections will cease.

This won't be included in your benefit calculations at retirement.
"

If it helps for some extra context (I'm not sure it does): a quote for APB under the CA scheme today, for 5 units, or £1,250, (obviously I'm older, and we're not talking about the remedy period rates, but in case it adds anything to the overall picture...), based on my current age/NPA, is £15,400 if paid for in a lump sum, and £16,850 with dependent benefits. I still have some notes from early 2020, and the cost per unit (one "unit" is £250 per annum) based on my age, etc., and the other relevant factors used by TPS at that time, was £2,310 without dependent benefits (so £11,550 would have been the price to add £1,250 per annum without dependent benefits, towards the end of the final financial year in which I did FA).

flexibilly

Ok, well here are my efforts at some analysis based on my own situation, in the hope it might be useful to reflect on for anyone else in a similar position. If any of the more knowledgeable folk here are moved to add to/comment on/demolish any/all of the points, then great. If not, I’ll try and come back and at least share my decision (and any further thinking/findings) before the November 1st October 2024 deadline:

1.        I’m lucky to have access to a defined benefits pension scheme at all (see also many discussions on this forum)

2.        Me, and others effected by the transitional protection remedies in this and similar schemes, are likely to want to select Final Salary (FS) treatment of our service over Career Average (CA), wherever that option is available (that’s why the cases were brought in the first place); again, I’m lucky the option has become available. [EDIT: Incorrect/overly strong assumption. See also the @Universidad reply below.]

3.        I rushed into faster accrual (FA) not fully understanding how my pension worked, but hoping to keep alive the possibility of an early retirement; reading the forums here I think I probably got the wrong flexibility and additional pension (AP) would have been a better option; I’m therefore lucky, again, to have the option of conversion from FA->AP all these years later

4.        The compensation offer is my original contribution plus some interest. I believe from hunting the TPS pages that they might be using historic NS&I rates. On that basis, I rule out the interest having been modelled from 2015 up to today (in 2024). My best guess/instinct is that it has been modelled over the remedy period only (no calculations are on offer) [EDIT: Wrong. My best understanding now is that it’s my original contributions, minus tax deductions appropriate for the year I paid them in, plus interest up to the deadline for a decision 1/10/2024. Because I think my tax deductions for the period should have been at 20% (for me personally), I can only conclude that the interest calculation method is quite generous. I tried modelling it (see later posts), but I couldn’t nail down the details. But my conclusion is still that it’s generous. I appreciate that’s a subjective judgement but it’s better than if I had saved my original flexibility payments (after tax) into an NS&I savings account each month.]

5.        Based on the above, I’m not confident the AP I’m being offered has had the CPI-based indexing applied to it right up to and including 2024; the phrasing of option 1 (“…plus indexation”) might mean that anyone who accepts the offer then finds that CPI inflation is later applied for the years after the remedy period but before they make their decision (22/23, 23/24), but they might not, and this would be consistent with the lack of interest on the compensation offer (see above). [EDIT: My misunderstanding of the interest calculation was leaving me sceptical. My current best understanding is that the AP/FA amounts shown in option 1 are correct for the end of the remedy period, 31 March 2022 (and therefore not directly comparable with the compensation offer, which is a bit confusing). I think, if you accepted either possibility via option 1, then the indexing would continue as normal from the end of the remedy period (with some quite high CPI numbers).]

6.        The offer of AP I’m being made, if bought today in a lump sum and without dependent benefits, would cost me a lot more than the offer of compensation I’m being made (about £15.4K versus £10.8K)

7.        My notes from 2020 (when I finally sat down and got to grips with how my pension worked) are a record that the AP would have cost only a little more than the compensation back then, and based on the TPS calculator’s workings, the theoretical cost would have got cheaper moving back through the years of the remedy period (me gradually younger in each of those years if what produced the change in the quote); so the amount of AP on offer makes sense to me, again I’m only talking about instincts/guesses though (no calculations are on offer)

8.        It seems reasonable to hope that the FA->AP calculation removed the unit discretisation (i.e., for the purposes of the remedy calculation, it wasn’t only made available in £250 per annum chunks, as it usually is) and that no AP is lost based on any sort of rounding down to the nearest unit (or gained based on rounding up)

9.        Via FA, there was potential benefit to the partner/children of the person purchasing the flexibility, after their death; none of this is true for AP unless it’s explicitly purchased with the “dependent benefits” option (which costs more); it might have been reasonable, therefore, to hope option 1 above would also offer the equivalent amount of AP (i.e., less), but with dependent benefits (though perhaps some here might remember that AP under the old FS scheme didn’t have a with “dependent benefits” option)

10.   Neither me or anyone else affected will ever get access to the calculations behind the figures they are being offered

11.   In early 2020, I looked hard at my pension and really tried to understand how it worked (I know, a bit late, lol); both the older final salary portion, and the newer career average portion (as it stood at the time). My conclusion then – doubtless controversial, see also 1 – was that the flexibilities were not worth it. I decided to stop paying for any, and in fact, I remember slightly regretting having ever made the extra payments in the first place (but note my thinking may have been clouded by youngest child’s nursery fees kicking in)

12.   For what it's worth, here's what my modelling efforts told me in early 2020 (all the figures were non-inflated 2020 money, which I found easier to deal with; i.e., they don't try to model the effects of inflation): committing to either AP at £250 extra per year, or FA at 1/45 every year both led me to ~34K/annum at age 58, reduced to ~22K/annum after the actuarial adjustment. With basic contributions led me to ~29K/annum at age 58, reduced to ~19K/annum after the actuarial adjustment. (See above for the different potential implications for partners/children.)

13.   I’m wrongfooted by having the offer the compensation, I have to be honest. Any other teacher who bothered to read this far might be feeling similar. You don’t have to look far on this forum or others to see that people without access to this kind of defined benefits scheme consider teachers and similar professions to be lucky to have these kinds of AP deals on offer. When I first read the letter, I thought: “don’t be a fool, take option 1 and pretend no compensation was ever on offer”. But I keep wondering. I don’t have a SIPP, or even a stocks and shares ISA. I have nothing but an emergency fund and a mortgage! But I’m financially disciplined, both kids are out of nursery now, and I’m back saving again, and if I’m serious about trying to do early retirement, and plugging the gap between 58 (or whatever age I feel I can go) and my state pension kicking in, then maybe I need to take the compensation and do something else that isn’t AP. Another egg in another basket. [EDIT: if you’re interested: I came down in favour of accepting the compensation offer. Now I’ve understood tax was deducted before interest was added, and that no further tax is due on the compensation amount, I think the overall offer is generous. For someone like me, who slightly regretted paying for the flexibilities in the first place, it offers a good way to undo what I now view as a past misstep. Not perfect perhaps but certainly as good as I could possibly hope for (and very much unexpected). For others the judgement may be a different one, of course.]

As above, I’ll try to come back and post my decision before the deadline for choosing (1st October) even if the thread remains dead, just in case it helps anyone else make their decision. If you're reading the thread between now and your own October deadline for Rollback Choices, and you found something useful elsewhere on this forum, please consider linking to it here.

Universidad

flexibilly said:

1.        I’m lucky to have access to a defined benefits pension scheme at all (see also many discussions on this forum)

That's certainly a positive way to look at it. People who go into professions that happen to have DB pensions, and then retire without ever paying much attention are lucky.

The rest of us have, I would argue, made a choice at some level.

flexibilly said:

2.        Me, and others effected by the transitional protection remedies in this and similar schemes, are likely to want to select Final Salary (FS) treatment of our service over Career Average (CA), wherever that option is available (that’s why the cases were brought in the first place); again, I’m lucky the option has become available

I don't think that's a given. In many cases CARE schemes come out ahead because of wage supression in the public sector over the last 20 years. Earning more as your career went on used to be taken as a given, but these days you can wind up behind in real terms even with career progression. That really undermines the value of a FS pension. Public sector CARE schemes tend to have higher accrual rates and sometimes even revaluation above CPI, countering for the fact that that accrued benefits no longer increase in value with career progression.

I've seen my wife's remedy estimates, and any way we swing it the CARE pension comes out ahead 2015-22. Of course we still might wind up taking advantage of the FS option if my wife gets a massive pay rise (ha!) or if the state pension age rises really significantly.

The FS scheme has a fixed retirement age of 60, but even accounting for retiring 8 years "early" on the CARE scheme it comes out way ahead with current factors. It's also possible that the minimum retirement age for the CARE scheme could be raised at some point, but I don't think that's on the cards for the FS scheme.

davepayl

i am considering taking the compensation and putting it into a fixed ISA. Rates are good right now and likely to reduce. The interest won't match the amount converted to additional pension payments (just over £500 (at 4%) after 5 years rather than £700 on FS) but it gets close after a while and does feel like a good option to have this additional pot to draw on. Very tricky decision though - it will depend on when I actually retire so deferral might be better.

cobson

For TPS members this site is a good read, the author enjoys sorting out the best options for people:

Contemplating retirement; the wise learn from the mistakes of others. - The Classroom in rear view (dfountain.co.uk)

flexibilly

cobson, that site is amazing, thank you. I'm slowly working my way through it. Strong recommend to all other teachers in TPS.

flexibilly

Universidad, thank you re point 2. That's so important and useful to hear. And I think the site cobson links to helps people who will now potentially have access to a lot more FS service, post the remedy, to understand their options better (you need to be mindful of how future earnings will impact your "old" FS service). Even though, as you say, it still may not be close to being as attractive as CARE...

flexibilly

davepayl, after a bit more reflection I was coming to the same conclusion.

But then I realised: the compensation will be taxable.

For me personally, TPS contributions are all that keep me from exceeding the higher-rate tax threshold. Looking at my last payslip it was a margin in the low hundreds for last financial year.

So for me, the compensation would be taxed at 40%. I think I have to accept option 1 and the AP.

*** I guess I could be fairly average for my age/service, so teachers beware. The letter doesn't mention tax on compensation - maybe it's obvious but I wasn't sure. ***

My understanding of pensions/tax is probably well below where it should be but I don't think it's that unusual, unfortunately (e.g., versus other friends at work).

If you're in a similar position and thinking of purchasing more AP (or other flexibilities) rather than letting your taxable income pass the threshold, then, I _think_ you need to look at the "retrospective AP" possibilities via the remedy, for potentially better value. (Warning: I'm still at the early stages of understanding this via the site linked to by cobson, however - do your own research of course.)

Taxable income >50K also has implications for other things like child benefit. But I _think_ I'm right in saying this threshold has just gone up to ~60K.

As always, I'm hopeful of being corrected by one of the many more knowledgeable posters here.

flexibilly

I think I can correct one thing, at least. I'm wrong about "Retrospective AP" being an option for active members. It's only an option once you retire (for 6 months after you get your Remediable Service Statement). Makes sense, of course, it's only going to be relevant if you do end up opting for FS...

flexibilly

I'm also unsure about the tax on compensation issue as well. See the quote from the TPS literature:

"

Paying compensation

To determine the money owed by you to the Scheme, we’ll calculate the total net pension contributions due then add the relevant compound interest. The interest used is the National Savings & Investment (NS&I) rate.

To determine money owed by the Scheme to you, we’ll calculate the total net pension contributions due and deduct the tax you would have paid. After this, we’ll add the interest owed to you. For the first 28 days after issue of the RSS the interest rate will be 8%; if the payment is later than this, the NS&I rate will be used.
"

Link (see final section): https://www.teacherspensions.co.uk/members/scheme-changes/transitional-protection/compensation.aspx

Are they possibly unscrambling the tax issue on behalf of those accepting compensation? By paying the tax that would have been due at the time to HMRC on our behalf?

Someone better than me, please?

hugheskevi

flexibilly said:

I'm also unsure about the tax on compensation issue as well. See the quote from the TPS literature:

"

Paying compensation

To determine the money owed by you to the Scheme, we’ll calculate the total net pension contributions due then add the relevant compound interest. The interest used is the National Savings & Investment (NS&I) rate.

To determine money owed by the Scheme to you, we’ll calculate the total net pension contributions due and deduct the tax you would have paid. After this, we’ll add the interest owed to you. For the first 28 days after issue of the RSS the interest rate will be 8%; if the payment is later than this, the NS&I rate will be used.
"

Link (see final section): https://www.teacherspensions.co.uk/members/scheme-changes/transitional-protection/compensation.aspx

Are they possibly unscrambling the tax issue on behalf of those accepting compensation? By paying the tax that would have been due at the time to HMRC on our behalf?

Someone better than me, please?

There are 2 separate processes:

(1) Where the member owes the scheme money - not relevant here
(2) Where the scheme owes the member money - as described above, ie,

The scheme will calculate the gross voluntary pension contributions you paid. Then it deducts the tax relief you received on those contributions. Then interest is added, calculated at 8% simple interest from the date of the payment until 28 days after a Remedial Service Statement is issued. After that interest switches to compound interest based on NS & I rate.

Compensation is not taxable.

You may find it helpful to refer to HM Treasury Directions.