Is this a good deal?

conradmum · 12 February 2007 at 4:09PM

I've just started buying extra years in my teacher's pension scheme. I calculate that I'll pay £10,800 over ten years, and that this'll buy me about £750 a year if I retire at 60, index linked and some spouse benefit if I die. This is all at today's values of course. Does this compare well with an averagely performing stock and shares ISA?
I know the teacher's pension is good, but there's no additional contribution from the employer when you buy added years, so not sure how this compares.

Edited to add: Sorry, I should have said I'm 42 and the monthly contribution is £90 at the moment.

jem16 · 12 February 2007 at 5:11PM

You mention paying over 10 years yet you have 18 years until retirement date.

When I bought added years. the payment was to be paid up till the retirement date.

Which are you doing?

conradmum · 12 February 2007 at 5:21PM

Not sure if your scheme is slightly different to mine Jem. I'm FE. You could nominate the percentage and the number of years. I chose 10 years but could have chosen a different amount.

jem16 · 12 February 2007 at 5:34PM

I'm in the Scottish scheme - it may well be different.

The main difference is that I bought pensionable years which was then linked to my final salary as opposed to the new version which buys an amount. I feel that the purchase of pensionable years is/was a much better option than the new version.

As a rough guide. £90pm invested for 10 years and making 7%pa would give you £15,482. If you then took an income of 5%pa that would give you £774.10 and still be allowing growth at 2%.

conradmum · 12 February 2007 at 7:08PM

Thanks. It seems much of a muchness.
I've bought the added years in the old scheme. I calculated £750 pa based on 2/80ths my current salary of nearly £30,000. (Ten years contributions buys me two years of 1/80 final salary. I don't envisage rising higher in my profession and we only ever get cost of living rises.

jem16 · 12 February 2007 at 7:38PM

Yes but even taking a rise of 2%pa over 18 years, your final salary could be £42,847. 2/80 of this would be £1071 - better by £320.

If you had invested £90pm for 10 years and then left it to grow for the next 8 years until you retired, you could have £26,601 at 7%. Then taking 5% income you would have £1330pa - £580 more.

conradmum · 12 February 2007 at 7:52PM

jem16 wrote:

Yes but even taking a rise of 2%pa over 18 years, your final salary could be £42,847. 2/80 of this would be £1071 - better by £320.

If you had invested £90pm for 10 years and then left it to grow for the next 8 years until you retired, you could have £26,601 at 7%. Then taking 5% income you would have £1330pa - £580 more.

Thanks Jem. The ISA route looks better on the surface, but the pension would be index linked. How would the ISA option shape up ten years after retirement?

jem16 · 12 February 2007 at 8:06PM

conradmum wrote:

Thanks Jem. The ISA route looks better on the surface, but the pension would be index linked. How would the ISA option shape up ten years after retirement?

Well if you had a pot of £26,601 at retirement and it grew at 2%(trying to allow for 5% income) you would have £32426 after 10 years, giving you £1621 at 5%.

Would your £750pa extra have grown by this amount over 10 years?

However the biggest difference which I haven't accounted for is the extra saving on tax as your £90pm is actually worth £115 if you are a basic rate taxpayer. To be honest I haven't a clue how to work that bit out.

Just had a thought. The tax part probably doesn't make a big difference because you would be taxed at 22% on your pension but not on the income from the ISA.

conradmum · 12 February 2007 at 9:41PM

jem16 wrote:

Well if you had a pot of £26,601 at retirement and it grew at 2%(trying to allow for 5% income) you would have £32426 after 10 years, giving you £1621 at 5%.

Would your £750pa extra have grown by this amount over 10 years?

I think the short answer to that is no!

jem16 wrote:

However the biggest difference which I haven't accounted for is the extra saving on tax as your £90pm is actually worth £115 if you are a basic rate taxpayer. To be honest I haven't a clue how to work that bit out.

Yes, this is one of the reasons I opted to buy extra years. I know I pay the tax on the pension income but I do get a lump sum of it tax free, and I think we may get more in the way of child tax credits this way.

jem16 wrote:

Just had a thought. The tax part probably doesn't make a big difference because you would be taxed at 22% on your pension but not on the income from the ISA.

I'm hoping to get my pension to the £10,000 threshold, then start saving in other ways once I have that minimum security.

jem16 · 12 February 2007 at 10:35PM

conradmum wrote:

I'm hoping to get my pension to the £10,000 threshold, then start saving in other ways once I have that minimum security.

Don't forget your state pension which will account for around £4300, although you won't get that till at least 65. That would leave around £5700 for your teacher's pension.

Good luck with whatever happens.

Is this a good deal?

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