Teachers Pension - clarification

NotMyRealNameEither

Newbie here looking for clarification that I'm understanding this correctly,

We're considering using the Faster Accrual method to top up my wife's Teachers Pension but on the face of it the numbers seem counter intuitive - if she pays at 1/45th for a year it costs her approx £2500 and adds just £131 to her pot.

Am I correct in my understanding however that:
1. It adds £131 guaranteed income PER YEAR once she retires?
2. This amount is CPI + 1.6% linked so essentially will be £200+ in 15-20 years time?
3. She gets tax relief on the £2500 so it's effectively £2000?

If this is so then she'll be up on the deal should she live more than 10 years or so into retirement (which we *!$&***&! hope she does!)

I know there are elements to consider like basic allowance at retirement and how long she continues working etc but is this conceptually what we're buying?

Many thanks all.

hugheskevi

Am I correct in my understanding however that:

1. It adds £131 guaranteed income PER YEAR once she retires?

Yes, along with survivor benefits if she dies before her partner, and also would slightly increase ill-health and death benefits (fairly marginal considerations, but they all have some value).

2. This amount is CPI + 1.6% linked so essentially will be £200+ in 15-20 years time?

As long as she continues in scheme employment. If she leaves it is just CPI.

Purchasing Added Pension would mean it simply goes up in line with CPI from date of purchase and so is not affected by how long she remains in the scheme. So if she is committed and expects to be in similar employment all her career Faster Accrual may be better than Added Pension, but if not then it may be the other way around.

3. She gets tax relief on the £2500 so it's effectively £2000?

Yes

If this is so then she'll be up on the deal should she live more than 10 years or so into retirement (which we *!$&***&! hope she does!)

Remember that the correct comparison would be what can be achieved if they money were instead put into a Defined Contribution (DC) pension. That would almost certainly return more than price-growth.

Faster Accrual is priced using an effective return of CPI+1.7% after costs (the scheme's discount rate). That is lower than you would expect from a DC investment, but doesn't have any investment risk and is fully inflation protected. 

I know there are elements to consider like basic allowance at retirement and how long she continues working etc but is this conceptually what we're buying?

You are choosing to buy something that:

• Has no investment or inflation risk
• Will probably give a worse outcome than DC pension, but doesn't carry the investment risk of DC
• Unlike DC pension doesn't really have a tax-free lump sum, due to the terrible commutation rate
• Is more suitable if she is very committed to remaining in similar employment all her career.

So it is largely a case of prioritising certainty over expected return. That isn't necessarily a bad thing - it depends on individual preferences.

22225

Thank you I think you've answered my other post.

NotMyRealNameEither

Thanks hugheskevi.

I know there's loads of other things to consider but I just needed to know I had the principle right!

Much appreciated.