Teachers pension - phased retirement query

stuart746

Hello All,
I'm a member of the Teachers Pension Scheme which I joined at the start of my career. I turn 55 next April and I am taking phased retirement, sometimes called partial retirement, from 1st May (moving from 1.0fte to 0.6). As part of this phased retirement I will be taking 50% of my Final Salary (NPA60) pension scheme benefits. I'm leaving the other 50% Final Salary as well as the career average benefits to accrue until my normal pension age (60). I am happy with this arrangement as the total salary + pension benefits will provide more than enough income to age 60.

I had a few questions related to the automatic tax free lump sum (3 times pension), which is only for the Final Salary element of the pension. My understanding is that by taking 50% of the Final Salary pension benefits I am also only entitled to 50% of the total tax free lump sum available on the 1st May. When I fully retire at age 60 I will take the other 50% FS pension benefit (along with the career average element) and presume I will be entitled to the other 50% of the automatic lump sum, but will it also be tax free? I find this a bit confusing as it assumes you can effectively have tax free lump sum payments in different years... is that correct?

The other questions relates to my Prudential AVC which I have invested in alongside the TPS. I am undecided whether I take that as part of my allowable 25% tax free lump sum as I may decide to transfer the funds to an ISA, keeping it invested and make use of tax efficiencies. Alternatively, I could keep it in an AVC until full retirement at age 60 if it makes more sense as I could still add to it via salary sacrifice. TPS do not manage the Prudential AVC and do not seek clarification over my plans with this, but how do I make sure if I take it that it will be treated as part of the allowable tax free amount.

Many thanks for your help in advance.

MarlowMallard

stuart746 said:

Hello All,
I'm a member of the Teachers Pension Scheme which I joined at the start of my career. I turn 55 next April and I am taking phased retirement, sometimes called partial retirement, from 1st May (moving from 1.0fte to 0.6). As part of this phased retirement I will be taking 50% of my Final Salary (NPA60) pension scheme benefits. I'm leaving the other 50% Final Salary as well as the career average benefits to accrue until my normal pension age (60). I am happy with this arrangement as the total salary + pension benefits will provide more than enough income to age 60.

I had a few questions related to the automatic tax free lump sum (3 times pension), which is only for the Final Salary element of the pension. My understanding is that by taking 50% of the Final Salary pension benefits I am also only entitled to 50% of the total tax free lump sum available on the 1st May. When I fully retire at age 60 I will take the other 50% FS pension benefit (along with the career average element) and presume I will be entitled to the other 50% of the automatic lump sum, but will it also be tax free? I find this a bit confusing as it assumes you can effectively have tax free lump sum payments in different years... is that correct?

The other questions relates to my Prudential AVC which I have invested in alongside the TPS. I am undecided whether I take that as part of my allowable 25% tax free lump sum as I may decide to transfer the funds to an ISA, keeping it invested and make use of tax efficiencies. Alternatively, I could keep it in an AVC until full retirement at age 60 if it makes more sense as I could still add to it via salary sacrifice. TPS do not manage the Prudential AVC and do not seek clarification over my plans with this, but how do I make sure if I take it that it will be treated as part of the allowable tax free amount.

Many thanks for your help in advance.

Re the first question, yes it's fine to take multiple tax-free lump sums as long as each one doesn't exceed 25% of the amount you "access", and the lifetime total of all lump sums doesn't go over £268k. 
When you start a defined-benefit annual pension, HMRC count this as an imaginary "pot" of 20x annual pension (referring to the chunk you're starting now) ; the max lump sum you can take is then 6.66x annual pension, because 6.66 is 25 percent of (20 + 6.66).   This is a "use it now or lose it", so if you have enough you could potentially take up to 3.66x annual pension tax-free from your AVC along with the 3x from TPS.   Quite how you synchronise it to make sure the extra 3.66x is tax-free is beyond my knowledge; I'm in USS where both DC and DB parts are under a single umbrella so it's easier.    It is probably a good idea to take the extra from a tax-saving perspective. 

DRS1

I know nothing about the TPS but isn't the NPA for the CARE part of it the same as your State Pension Age?

Would you be better asking TPS your questions?

I know some people don't think highly of the TPS admin but they should know the answers.

There is also a facebook page for members of the TPS and maybe you could ask on there.  It is mentioned in this thread
Teachers' Pensions — MoneySavingExpert Forum

katejo

DRS1 said:

I know nothing about the TPS but isn't the NPA for the CARE part of it the same as your State Pension Age?

Would you be better asking TPS your questions?

I know some people don't think highly of the TPS admin but they should know the answers.

There is also a facebook page for members of the TPS and maybe you could ask on there.  It is mentioned in this thread
Teachers' Pensions — MoneySavingExpert Forum

I had similar thoughts. The NPS for my CARE is currently 66 but goes up to 67 in April 2027. The final salary part which was closed in 2016 won't be reduced at all if I retire before 66/67 but parts of it will be if I stop before 65/66/67.

stuart746

Thanks for comments MarlowMallard and DRS1.

I also reached out to David Fountain, an ex-teacher who runs a very helpful YT channel and website. He said, 'Yes, the lump sum is always tax free (subject to any changes in the rules of course). There is no issue with it being taken in different years. If you had different pension schemes you could take the lump sums from each one in a different year and this is no different. With "pots" of money pension schemes it is possible to enter into flexi-drawdown plans and take lump sums out at different times as well.'

I've made a decision to leave the AVC where it is for now as I have no need for it, I can still add to it via salary sacrifice and will take it when I fully retire.

Yes, the NPA for the CARE scheme is the same as state pension age but I will be taking it early (and with the actuarial age reduction for taking the benefits for longer)

DRS1

stuart746 said:

Thanks for comments MarlowMallard and DRS1.

I also reached out to David Fountain, an ex-teacher who runs a very helpful YT channel and website. He said, 'Yes, the lump sum is always tax free (subject to any changes in the rules of course). There is no issue with it being taken in different years. If you had different pension schemes you could take the lump sums from each one in a different year and this is no different. With "pots" of money pension schemes it is possible to enter into flexi-drawdown plans and take lump sums out at different times as well.'

I've made a decision to leave the AVC where it is for now as I have no need for it, I can still add to it via salary sacrifice and will take it when I fully retire.

Yes, the NPA for the CARE scheme is the same as state pension age but I will be taking it early (and with the actuarial age reduction for taking the benefits for longer)

This is where me not knowing anything about TPS is something you should take seriously.  The following comes from ignorance not from knowing the answers.

As a general principle what you can do with a DC pension scheme (eg take it in chunks with bits of TFLS taken at different times) is NOT what you can do with a DB pension scheme (such as the TPS).  For a standard DB pension scheme you take the TFLS when you start to take your pension and not at any other time.  It is actually called a Pension Commencement Lump Sum. But in a standard DB pension you take all of your pension at the same time.  Phased retirement where you start to take half at one time and another half at another time is something strange (though maybe it has become normal for public sector schemes).

That is why I think it best to check with TPS themselves.  I would like them to confirm that you can take half your TFLS when you start the first half of your final salary pension and the second half of the TFLS when you start the second half of your pension.

I would also like them to explain how the AVC lump sum calculation would work where you have split your final salary TFLS and pension.  It is one thing to say you do this calculation (the one explained by @MarlowMallard) to allow you to take all (or almost all) of your AVC fund as a TFLS if all your pension benefits start at the same time but what happens if you already took some of those benefits 5 years ago - do you do a calculation based on what you are taking at age 60 or do you include what you took at age 55 as well?  Or indeed do you get to/have to take part of your AVC fund at 55?  As I recall one feature of the AVC as lump sum feature is that if you try to take the AVC at a different time to the main scheme benefits then you lose the feature and are stuck with taking 25% of the AVC fund as TFLS.  I don't know how that interacts with the half now half later phased retirement feature.

MarlowMallard

DRS1 said:

That is why I think it best to check with TPS themselves.  I would like them to confirm that you can take half your TFLS when you start the first half of your final salary pension and the second half of the TFLS when you start the second half of your pension.

I would also like them to explain how the AVC lump sum calculation would work where you have split your final salary TFLS and pension.  It is one thing to say you do this calculation (the one explained by @MarlowMallard) to allow you to take all (or almost all) of your AVC fund as a TFLS if all your pension benefits start at the same time but what happens if you already took some of those benefits 5 years ago - do you do a calculation based on what you are taking at age 60 or do you include what you took at age 55 as well?  Or indeed do you get to/have to take part of your AVC fund at 55?  As I recall one feature of the AVC as lump sum feature is that if you try to take the AVC at a different time to the main scheme benefits then you lose the feature and are stuck with taking 25% of the AVC fund as TFLS.  I don't know how that interacts with the half now half later phased retirement feature.

I'm in USS not TPS, but at least in USS you can take the DB pension in up to 3 chunks, at least 20% each chunk and you must leave at least 20% behind until the final chunk when you fully retire.  Each time you start a chunk of annual pension £ P per year, you can take a TFLS of up to 6.66 x P (the chunk you're starting now, past and future chunks don't come into it).   This can be the 3x P default plus 3.66x P from an AVC,  or other permutations e.g. commute pension for lump.    If you don't take the AVC lump at the same time then you lose the tax-free status of 3.66x P  and only get the usual 25% tax-free. 

Suppose the OP's pension is £20k at 60.  If he takes half now, he'll get £10k pension but reduced by an ERF,  say £8k and £24k lump.  He can take up to 3.66x 8k = £29k tax-free from AVC *at the same time*.  Then at 60 he'll get another £10k pension and £30k lump and may take £36.6k from AVC.   If he didn't take the first £29k, that's tough it's still £36.6k  . If his AVC is under £36k he may not care.  Anything left in AVC afterwards is 25% tax-free. 
   

DRS1

Thanks @MarlowMallard.  Perhaps the OP will want to think about that as he said he wasn't going to take any of the AVC at 55.  Of course TPS may not work the same way as USS.

stuart746

DRS1 said:

Thanks @MarlowMallard.  Perhaps the OP will want to think about that as he said he wasn't going to take any of the AVC at 55.  Of course TPS may not work the same way as USS.

Indeed. I was not planning to take it but will check with the TPS and the Pru (the AVC administrators) - the amount will depend on investment performance but is currently 50k and increasing contributions at 6k a year.

Similar to the USS you can take the TPS in chunks (up to 2 times before full retirement with the FS element and 3 times with the CARE scheme). It is all rather over complicated.

Thanks both.

TonyM19

I took phased retirement from the TP.  I took it in 2 chunks.  There is an inbuilt penalty on your Final Pension for doing this, which is undocumented.  If you are going to do it (and it was the best thing I ever did), don't do it in more than one chunk would be my advice

stuart746

TonyM19 said:

I took phased retirement from the TP.  I took it in 2 chunks.  There is an inbuilt penalty on your Final Pension for doing this, which is undocumented.  If you are going to do it (and it was the best thing I ever did), don't do it in more than one chunk would be my advice

That's interesting. Do you mean you two phased retirements before you retired fully? I am unlikely to do this as I plan to take it at 55 and then retire at 60, but I'm curious what the penalty was. The guidance on the TPS website is very limited.

Thanks.