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  • FIRST POST
    • foofi22
    • By foofi22 15th Oct 19, 10:30 AM
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    foofi22
    Teacher pension scheme options
    • #1
    • 15th Oct 19, 10:30 AM
    Teacher pension scheme options 15th Oct 19 at 10:30 AM
    Hi


    My wife (standard rate tax payer) is a member of (and currently pays into) the teacher pension scheme (TPS)

    She'd like to contribute extra towards retirement (to hopefully enable an earlier retirement) but is unsure what option is "best"

    The options within TPS are far as we know are:
    - additional pension.
    - faster accrual
    - reduce NPA to 65

    Or outside of the TPS:
    - contribute to a S&S LISA
    - contribute to a personal pension

    I generally understand the differences between LISA and personal pension options. Although I don't particularly know which of these two is better in our case. I like that LISA is tax free but contributions stop at 50 and has a slightly higher access age.

    We have no idea about the TPS options, which is the crux of this post.

    We know the TPS scheme is a "good deal " but are any of the three options a good deal?

    As an example, the online calculator for additional pension says that it would cost 1449 a year for 20 years to get 2000 extra pension which to me at least doesn't seem overly generous.

    Is one TPS option better than the others? For example is it "better" to (a) pay to reduce NPA to 65 or (b) buy faster accrual and retire at 65 but take the actuarial reduction?

    I realise this might be a bit open ended but just looking for some general guidance and thought on what other people might be doing

    Thanks
Page 1
    • rawhammered
    • By rawhammered 15th Oct 19, 11:34 AM
    • 69 Posts
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    rawhammered
    • #2
    • 15th Oct 19, 11:34 AM
    • #2
    • 15th Oct 19, 11:34 AM
    I too would like to know this!
    • kangoora
    • By kangoora 15th Oct 19, 12:15 PM
    • 891 Posts
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    kangoora
    • #3
    • 15th Oct 19, 12:15 PM
    • #3
    • 15th Oct 19, 12:15 PM
    I'd be interested in the options also, mainly to inform my son (24 years old) who has just started his 'training year' as a maths teacher - part-timing schools and Uni.
    • stephenadarglas
    • By stephenadarglas 15th Oct 19, 3:50 PM
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    stephenadarglas
    • #4
    • 15th Oct 19, 3:50 PM
    • #4
    • 15th Oct 19, 3:50 PM
    Firstly sign up and become a member of the website https://www.teacherspensions.co.uk.

    There are numerous calculators you can use to see what you can be entitled to at various retirement years.

    Also you can make AVCs (additional voluntary contributions) through the Prudential.

    Of course you could also set up your own Self Invested Personal Pension as well as the Pru options for investments can be limited. Costs are also a factor.
    • tony4147
    • By tony4147 16th Oct 19, 7:35 AM
    • 310 Posts
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    tony4147
    • #5
    • 16th Oct 19, 7:35 AM
    • #5
    • 16th Oct 19, 7:35 AM
    Firstly sign up and become a member of the website https://www.teacherspensions.co.uk.

    There are numerous calculators you can use to see what you can be entitled to at various retirement years.

    Also you can make AVCs (additional voluntary contributions) through the Prudential.

    Of course you could also set up your own Self Invested Personal Pension as well as the Pru options for investments can be limited. Costs are also a factor.
    Originally posted by stephenadarglas


    My wife went the AVC route with the TPS about 8 years ago, to be honest it's grown very, very little over the years, probably just kept pace with inflation, the choice of funds with Prudential is very limited.
    The only gain she has made is the fact that she is a high rate tax payer so gains the 40% relief.
    Last edited by tony4147; 16-10-2019 at 7:41 AM.
    • hugheskevi
    • By hugheskevi 16th Oct 19, 8:09 AM
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    hugheskevi
    • #6
    • 16th Oct 19, 8:09 AM
    • #6
    • 16th Oct 19, 8:09 AM
    My wife (standard rate tax payer) is a member of (and currently pays into) the teacher pension scheme (TPS)
    If there is prospect of her becoming a higher rate payer, it would probably be better waiting until then, investing money that would have gone toward the pension into an SSISA for the time-being.

    - contribute to a S&S LISA
    I'd divide this into both SSISA and LISA for purposes of comparison, they have different features.

    SSISAs are excellent for funding years before minimum pension age, or for funds that will benefit from being moved into a pension later, eg, when a higher rate taxpayer or benefiting from salary sacrifice.

    I like that LISA is tax free but contributions stop at 50 and has a slightly higher access age.
    Contributions stopping doesn't matter, that just affects what you do at age 50. If a LISA is the best option until then, contribute to it.

    The options within TPS are far as we know are:
    - additional pension.
    - faster accrual
    - reduce NPA to 65

    We know the TPS scheme is a "good deal " but are any of the three options a good deal?
    The options are all priced actuarially, with a discount rate (which is effectively a guaranteed rate of return in this context) of CPI+2.4%. That applies if all the actuarial assumptions are accurate in your wife's case. That will not be the case (eg she will either have a partner or not at retirement, whereas actuarial assumptions are likely to be that something like 90% of members have a partner at retirement and that 90% figure is applied to the whole cashflow projected - your partner cannot of course have 90% of a partner at retirement).

    Reducing NPA is probably the most straightforward option, as it is unaffected by changes to State Pension age. Although the age of access to unreduced pension would increase, if you have paid to get the pension 2 years early you still get the pension 2 years early.

    From a pricing perspective, Added Pension is almost identical to reducing normal pension age as they both use the same discount rate. The end outcome of buying either with a fixed amount of money would result in a very similar outcome if retiring at a fixed age prior to normal pension age, either with Added Pension increasing the amount of pension which is then actuarially reduced, or a reduced pension age reducing the standard pension by a lower percentage.

    However, unlike EPA, Added Pension can exclude dependent survivor pension, so if that is desirable a member may prefer Added Pension to take advantage of the option.

    Faster accrual is interesting, as the value of that depends on how long you remain in service and benefit from higher in-service revaluation. You cannot opt-out of things like survivor benefits, you get them (and pay for them, using the actuarial assumptions) whether you want them or not.

    So which option is best depends primarily on whether you want survivor benefits or not, and how long you plan to remain in service.

    As an example, the online calculator for additional pension says that it would cost 1449 a year for 20 years to get 2000 extra pension which to me at least doesn't seem overly generous.
    It depends how you value a return of CPI+2.4% without investment risk. A return of 4.5% - 5% p/a is nothing to write home about in general, but it is a lot higher than any comparable return without taking investment risk.

    It also creates a guaranteed income without the cost of annuitisation.That is great if you want a higher guaranteed income, not so good if you want income prior to State Pension age but don't want to reduce your future pension to obtain it.
    Last edited by hugheskevi; 16-10-2019 at 10:44 AM.
    • foofi22
    • By foofi22 17th Oct 19, 1:10 PM
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    foofi22
    • #7
    • 17th Oct 19, 1:10 PM
    • #7
    • 17th Oct 19, 1:10 PM
    Thanks, that's very helpful.

    It's the sort of thing I'm surprised there isn't a "dummies" guide for.

    In the group of teachers I know, there is a general lack of interest in pensions - maybe because they view their pensions as so generous that they needn't consider additional planning?

    However I think the general population also has a lack of interest in pensions!
    • Sobraon
    • By Sobraon 17th Oct 19, 2:55 PM
    • 316 Posts
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    Sobraon
    • #8
    • 17th Oct 19, 2:55 PM
    • #8
    • 17th Oct 19, 2:55 PM
    Can't comment on the new additional pensions inside the TPS as I was (mostly) under the old scheme. But outside of the TPS the obvious options are the PRU, LISA and SIPP.

    PRU advantages are payment is through payroll, negatives are a restricted choice of expensive funds and high charges. I have been a contributing member of the TPS since 1986 and I have never talked to anyone who was retiring who was happy that they had chosen the PRU (this is not evidence just my experience!). Please see my comments on the recent LGPS thread about PRU fund performance, also importantly in the TPS you dont get the great commencement lump sum tax advantage of the LGPS.

    LISAs are an interesting new idea the key advantage is the top up. Negatives are as I understand you can't withdraw until 60 without penalty and the LISA counts against you for means tested benefits. So if your wife decided to leave at 55 she couldn't access the LISA without penalty until 60 and couldn't really receive ESA ( if otherwise eligible). I was talking to a friend yesterday and both he and his wife are leaving teaching before 60 ( to go sailing).

    With a SIPP you get tax relief of course ( this is normally automatic for basic rate with the likes of Hargreaves) you can 'drawdown' from 55 ( 57 from 2028 I understand) and you have complete control. Negatives are you have complete control and you have to be very careful of charges but that is for another day,
    • tigerspill
    • By tigerspill 17th Oct 19, 3:39 PM
    • 420 Posts
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    tigerspill
    • #9
    • 17th Oct 19, 3:39 PM
    • #9
    • 17th Oct 19, 3:39 PM
    Can't comment on the new additional pensions inside the TPS as I was (mostly) under the old scheme. But outside of the TPS the obvious options are the PRU, LISA and SIPP.

    PRU advantages are payment is through payroll, negatives are a restricted choice of expensive funds and high charges. I have been a contributing member of the TPS since 1986 and I have never talked to anyone who was retiring who was happy that they had chosen the PRU (this is not evidence just my experience!). Please see my comments on the recent LGPS thread about PRU fund performance, also importantly in the TPS you dont get the great commencement lump sum tax advantage of the LGPS.

    LISAs are an interesting new idea the key advantage is the top up. Negatives are as I understand you can't withdraw until 60 without penalty and the LISA counts against you for means tested benefits. So if your wife decided to leave at 55 she couldn't access the LISA without penalty until 60 and couldn't really receive ESA ( if otherwise eligible). I was talking to a friend yesterday and both he and his wife are leaving teaching before 60 ( to go sailing).

    With a SIPP you get tax relief of course ( this is normally automatic for basic rate with the likes of Hargreaves) you can 'drawdown' from 55 ( 57 from 2028 I understand) and you have complete control. Negatives are you have complete control and you have to be very careful of charges but that is for another day,
    Originally posted by Sobraon
    Are the PRU payments salary sacrifice and hence attract the NI payment reduction as well and tax free?
    • Sobraon
    • By Sobraon 17th Oct 19, 5:10 PM
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    Sobraon
    No that's not what I meant. At one time my institution dabbled with this but it was voted down because of fear over the impact on the salary of reference ( now history). I was thinking about the difference in treatment for tax purposes of the PRU 'pot' between the LGPS scheme and the TPS
    • AnotherJoe
    • By AnotherJoe 17th Oct 19, 5:23 PM
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    AnotherJoe
    Offhand, seems to me that its preferable to have a personal pension of whatever type*, outside the TPS, for more flexibility in various dimensions - fund choice, charges, dates when you take it, different admin, if you are dissatisfied you can move it, less likely to be messed about with by yoir employers at a later date.



    * LISA, personal, SIPP
    • zagubov
    • By zagubov 17th Oct 19, 11:48 PM
    • 16,635 Posts
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    zagubov
    My wife went the AVC route with the TPS about 8 years ago, to be honest it's grown very, very little over the years, probably just kept pace with inflation, the choice of funds with Prudential is very limited.
    Originally posted by tony4147
    If you want the AVC to go into drawdown instead of say an annuity, there's a number of hoops to jump through. I'd not have bothered with having one if I'd known this at the start. I also stopped paying into my AVC when I worked out how expensive it was compared with what you could get, and put money into buying extra teachers pension, which I wish I'd done from the start.
    There is no honour to be had in not knowing a thing that can be known - Danny Baker
    • SouthLondonUser
    • By SouthLondonUser 18th Oct 19, 4:17 PM
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    SouthLondonUser
    If I understand correctly, faster accrual and additional pension are more similar than most people realise. In both cases you are buying additional pension, but, with faster accrual you are buying it as a % of your salary, while with additional pension you buy a fixed amount in GBP and then decide how to pay for it (lump sum, over x years, etc).

    Both options are subject to certain limits, i.e. you cannot buy more than ca. 7k worth of additional pension; the exact limits are here: https://www.teacherspensions.co.uk/updates

    Additional pension contributions can be deducted from your salary; it's not clear to me if that is via salary sacrifice and if therefore you benefit by paying less national insurance. Of course, if you contribute more than your salary, you wouldn't get a tax rebate on the part > salary. E.g. if your salary is 25,000 and you inherit some money, don't spend 30k to buy some additional pension all in one go - do it over 2 years at least.

    As for additional voluntary contributions via Prudential, does that have any advantage vs setting up your own pension with another provider? Unless it's salary sacrifice and you save on the national insurance, I can't think of why one would want to do it via Prudential (other than laziness and inertia).

    The TPS website has a calculator: https://www.teacherspensions.co.uk/members/calculators/flexibilities.aspx

    I get the impression not many people realise what a fantastic deal the TPS is. It is anunfunded liability of HMRC - what that means is, simplifying, that the money you pay into the scheme is spent every year by the state, and every year the pension liabilities are met with the funds available to the State. This is in contrast with a funded scheme, which collects money every year, invests it, and must use that money to pay a pension to its members. For example, academics of older, often more prestigious universities are very mad that their colleagues in the ex-polytechnics are in the TPS, while they are in the University Superannuation Scheme, which has been in crisis for a while (look up the headlines).

    In a banana republic, having your pension as an unfunded liability of the State is not good, but in a moderately stable and reliable advanced economy it is better- IMHO a scheme like the USSS is much more likely to be in trouble than the TPS, as events have shown. You are of course welcome to have a different opinion.

    Another thing to bear in mind is double taxation treaties. I remember reading somewhere that public pensions like the TPS are not tax free if you move to countries which give tax breaks to pensioners (eg Portugal).
    • zagubov
    • By zagubov 18th Oct 19, 11:57 PM
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    zagubov
    I get the impression not many people realise what a fantastic deal the TPS is. It is anunfunded liability of HMRC - what that means is, simplifying, that the money you pay into the scheme is spent every year by the state, and every year the pension liabilities are met with the funds available to the State. This is in contrast with a funded scheme, which collects money every year, invests it, and must use that money to pay a pension to its members. For example, academics of older, often more prestigious universities are very mad that their colleagues in the ex-polytechnics are in the TPS, while they are in the University Superannuation Scheme, which has been in crisis for a while (look up the headlines).

    In a banana republic, having your pension as an unfunded liability of the State is not good, but in a moderately stable and reliable advanced economy it is better- IMHO a scheme like the USSS is much more likely to be in trouble than the TPS, as events have shown. You are of course welcome to have a different opinion.

    Another thing to bear in mind is double taxation treaties. I remember reading somewhere that public pensions like the TPS are not tax free if you move to countries which give tax breaks to pensioners (eg Portugal).
    Originally posted by SouthLondonUser
    Well, sort of. Teachers and their employers have to pay up to 10% and 23% respectively into the scheme. So it is sort of funded. The private sector schools have to either offer something else or pay more into the scheme.

    Still it is better than the pre-1992 university USS scheme.

    I've heard good things about retiring to Portugal. Might need more exploring.
    There is no honour to be had in not knowing a thing that can be known - Danny Baker
    • SouthLondonUser
    • By SouthLondonUser 19th Oct 19, 12:06 AM
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    SouthLondonUser
    It is unfunded in the sense that, if I understand correctly, the money teachers pay into the scheme is not set aside to meet the pension liabilities of the fund, but spent by the State. The scheme is explicitly defined as unfunded in its annual report.
    • zagubov
    • By zagubov 19th Oct 19, 12:24 AM
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    zagubov
    It is unfunded in the sense that, if I understand correctly, the money teachers pay into the scheme is not set aside to meet the pension liabilities of the fund, but spent by the State. The scheme is explicitly defined as unfunded in its annual report.
    Originally posted by SouthLondonUser
    What I meant to say is that the scheme takes in sufficient money needed to pay out to the future pensioners, rather than the current ones, IYSWIM.

    The state does guarantee to make up any shortfall, right enough.
    There is no honour to be had in not knowing a thing that can be known - Danny Baker
    • SouthLondonUser
    • By SouthLondonUser 19th Oct 19, 5:48 AM
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    SouthLondonUser
    That I don't know. Is it in the annual report? How do you know? Not saying it's wrong, just that I'd be curious to learn more.

    Even if true, the fact remains that the money isn't set aside but spent by the State. That's why you are effectively taking country risk and in a banana Republic this would be a very bad structure.
    • JoeCrystal
    • By JoeCrystal 19th Oct 19, 6:18 AM
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    JoeCrystal
    What I meant to say is that the scheme takes in sufficient money needed to pay out to the future pensioners, rather than the current ones, IYSWIM.

    The state does guarantee to make up any shortfall, right enough.
    Originally posted by zagubov
    As far as I can see, the TPS does not have enough contributions coming in to pay the current pensioners. The TPS's expenditure was 9.7 billion in 2017-18, and with only 2.3 billion from the teachers and 4 billion from the schools, the Treasury has to top it up by 3.4 billion. I have little doubt that in the very long term future, such dear schemes will be closed and switch over to DC pension schemes.
    Last edited by JoeCrystal; 19-10-2019 at 6:32 AM.
    • hugheskevi
    • By hugheskevi 19th Oct 19, 8:50 AM
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    hugheskevi
    The funding arrangements for the unfunded public service pensions are as follows:
    • Every 4 years there is a Valuation of the scheme. This determines the employer contribution rate required.
    • The Treasury sets the assumptions to be used for the Valuation
    • A key assumption is the discount rate, which is effectively the assumed rate of return. A higher discount rate reduces the contributions required and vice versa. Over recent years the discount rate has been reduced due to lower expected future GDP growth as a consequence of Brexit.
    • The contributions of members and employers fund both the cost of current pension accrual and also a 'notional past service deficit.' They may also fund administration costs (varies by scheme).
    • The notional past service deficit is the difference between the pot of notional assets that is tracked and compared to liabilities. No pot actually exists, and as the result is heavily determined by the discount rate, it is very dependent on what HM Treasury assumes the discount rate is. As such, it is more a tool for the Exchequer to determine employer contribution rates than any sort of genuine deficit.
    • Each year the Exchequer votes money to employers, then takes the money back through employer contributions. Hence this is just money moving from account to account and so employer contribution rates do not really matter. Employers do have to pay them, so they are real in that sense, but it is just a part of their total budget which HM Treasury takes account of when deciding the total budget.
    • There is an accounting exercise under which member and employer contributions are used to pay pensions, with any surplus returned to the Exchequer and the Exchequer making up any shortfall. But this is just accounting.
    The above system means employers do bear the cost of their hiring and salary decisions through employer pension contributions. Note, there are some private sector employers participating in the schemes and the position is different for them, but most employers receive their money from HM Treasury.

    The system can also be presentationally helpful, for example, a large increase in allocated NHS spending could be partially clawed back by lowering the pension discount rate and so increasing the employer pension contribution rate.

    So to summarise,
    • There is no pot of money
    • Employer contributions are mostly about ensuring employers take account of pension consequences in their employment decisions
    • Employer contributions are primarily just money being given by HM Treasury to Departments and then taken back so do not help fund the scheme in any meaningful sense.
    • Member contributions do help with funding, and an accounting process nets these from pension paid out. However, this is just accounting, and it makes no difference whether member contributions were to go directly the Exchequer and the Exchequer fund all pensions or whether member pension contributions are offset from the pensioner payroll bill with the Exchequer picking up residual savings/costs each year.
    • hyubh
    • By hyubh 19th Oct 19, 12:53 PM
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    hyubh
    The above system means employers do bear the cost of their hiring and salary decisions through employer pension contributions.
    Originally posted by hugheskevi
    On that particular point, to an extent, though the risk is all with the taxpayer if the actuarial assumptions that have determined the contribution rates don't bare out. Employers (even private schools) account for the TPS on a DC basis (i.e. contributions as an expense on the balance sheet, not future pension payments as a liability). Whereas a private school in the LGPS (not many, but there's still a few) account for that scheme on a DB basis. A private school leaving the LGPS is a big deal (exit valuation, pay off its share in the deficit), the same school leaving the TPS, not so much, from a funding POV.
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