[Closed] Pension experts. Buying more pension (teachers pension)

For transferring the risk to them and getting an index-linked income, with spouse's pension, that sounds like good value. I would probably take it. Do you plan to work to 67 for the 'better' deal, or have you got other income/savings that would cover you from your retirement date to 67?

However, IANAIFA.

It's complicated

I get a pension at 60 which is currently my larger pot

I then get a pension at 67 which I am still paying into. My plan most likely plan is to work part time from 60 as I will have some pension income. If I feel the need to get out at say 64 I can take my other pension actuarially reduced or live on savings or tighten my belt and us the pension paying out at 60

What about stuff like mortgage etc, will that be paid off by 60?

Without knowing the full picture, obvs, but buying the additional benefit in the '67' pension, then doing the part-time stuff from 60-67 that you're currently thinking of, sounds like a reasonable plan

Use this cash as your pension until you've spent it, and then take your pensions.

How much more will your pensions be if you put off taking them?

Note, you'll pay tax on that money if you put it into your pension, but you won't if you just use it to live off.

I’m 56

I have inherited alot of money

I can buy an additional £5500 per year of income from 60 if pay them £122,640 now

Ignoring any inflation uplinks / indexing which I assume you get with your £5500, you'll get your money back if you live to 83 which is likely (your life expectancy is 84 according to https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07)

Looks OK to me (at a cusory glance).

That rate of return sounds pretty average to me even if it is good for an annuity. You are paying a price for the guaranteed income. At that sort of money I'd consider property. Its more effort and risk but the return will likely be substantially higher and that return will start straight away. You can always put that income into a pension fund. Also your partner will get all of it if you die. Obviously there are issues around using property as an investment vehicle but you get the opportunity to be a good landlord. I'd at least put some into a S&S ISA so you have some accessible money, and I'd do that soon so you can benefit from two tax years.

Caveat - I'm definitely not a pension expert, just doing my own personal pension management.

It’s complicated

I get a pension at 60 which is currently my larger pot

I then get a pension at 67 which I am still paying into.

I'm assuming the pension at 60 is from the teachers final salary scheme and the remainder on the average salary scheme......rather than from a non teacher related career beforehand.

If so - get some advice as it might not work as you think. I contacted Teacher's Pension (the English variant where I did most of my service) and the advisor said you only got to have one retirement date for both pots. ie. the choice was to take official pensionable retirement at 60 and get the final salary pot at full value but have to the take an early retirement penalty on the average salary pot getting it immediately at a significantly reduced rate. Or, forgo the first 6 years of payments from the final salary pot and take them both at 67. There was no uplift in value for not drawing from the final salary when it matures.

If you go for the former you can take however many days you need to take off and then return to work (i.e. a break in service is needed) but take care to not earn over whatever figure it is you can earn in addition to your pension.

Please don't take this as gospel and requires more investigating. I left the English TP scheme and am now in the Scottish so my situation is a no brainer as I bought 8 years of final salary pension over 13 years so the vast majority of my English pension is in the retire at 60 scheme. I'll hopefully not be teaching beyond 60. In fact still doing this in 10 years time makes me feel sick just typing this!

One cautionary tail - my father died at 66. My mum gets half of his pension but they had loaded most of their pension savings into his as it was a good one. He got just a few weeks of benefit before he died. She gets half of it (although because of her age and different Ts&Cs at the time if she were to move in with her new partner she would lose that) but that's not a great return on the money. If they had put the money into bricks and mortar she's 'probably' be better off now.

edit -

The main benefit of locking your money in a pension is that you pay tax on it when you take it out and avoid tax on it when you put it in. That doesn’t apply if you already have the money.

This is a very good point. When I bought past added years I was doing it with my pre-tax earnings. Doing it with already taxed money is less impressive. I guess it comes with security if you live a long retired life.

2nd edit-

Just reread - can you still pay into the legacy final salary scheme? I didn't know that. Also - how are you so sure about your return figures - surely it will be reliant on your final salary and/or your final average salary including the years you have not yet worked.

The main benefit of locking your money in a pension is that you pay tax on it when you take it out and avoid tax on it when you put it in. That doesn't apply if you already have the money.

To manage risk, it's good to have have some 'retirement funds' in the form of an annuity and some as investments. So if your investments do poorly, the annuity still pays out and you don't starve, but otherwise you benefit from taking the risk yourself. Investments normally do better than annuities, because the company offering the annuity has to ensure they can cover it, so only go for safe investments.

The main benefit of locking your money in a pension is that you pay tax on it when you take it out and avoid tax on it when you put it in. That doesn’t apply if you already have the money.

Not sure about paying into a final salary scheme, but with a money purchase scheme eg SIPP you get the tax back on a one off payment or rather the scheme claims the 20% basic rate for you and if you're a higher rate payer, you claim the other 20% yourself.

Thanks for all the feedback

Note, you’ll pay tax on that money if you put it into your pension, but you won’t if you just use it to live off.

Does this mean that I’ll pay tax in the income from the pension I receive. Rather than in taxed in the money I put in?

FYI I’m 100% dept free including mortgage. First thing I did with the money.

I will investigate tomorrow if I can pay for these extra years out of pre tax income and top up current earnings from savings.

If so – get some advice as it might not work as you think. I contacted Teacher’s Pension (the English variant where I did most of my service) and the advisor said you only got to have one retirement date for both pots. ie. the choice was to take official pensionable retirement at 60 and get the final salary pot at full value but have to the take an early retirement penalty on the average salary pot getting it immediately at a significantly reduced rate. Or, forgo the first 6 years of payments from the final salary pot and take them both at 67. There was no uplift in value for not drawing from the final salary when it matures.

That contradicts what the teacher pension agency told me. Although they told another colleague what they today you. My understanding is that if I go part time at 60 I can receive my final salary pension but wait for the career average. I’ll phone phone again tomorrow

Buying a house and contributing to the pension isn’t impossible. Might have to put a bit less in

Thanks for all the thoughts

I’ll phone phone again tomorrow

Great - if you could possibly post what they say or PM me that would be great! 🙂

Does this mean that I’ll pay tax in the income from the pension I receive. Rather than in taxed in the money I put in?

Pension income is taxable at your marginal rate.

You normally can take 1/4 tax free as a lump sum (scheme dependent), so effectively 75% of your pension is taxed.

But, you normally get the tax back when you pay in - however I don't know how this works with lump sums in Final salary schemes - best ask them.

However, my noddy sums suggest you'll be quids in after less than 20 years as your teachers pension will be indexed linked, so the £5500 per year will rise each year by some formula (scheme dependant).

Looked at this with my wife's NHS pension, we ended up not buying the extra yrs. Its the gamble if she was to die before the break even pay back timescale that's the majority of the money lost and the pension schemes gain. We intend to enjoy the money within the next few years.

Everyone's circumstances are different, this is what we thought was best for us at the time.

£110,000 gives you £5500 a year for 20 years, so if you're planning on retiring at 67 that will take you to 87. Not wanting to sound morbid but will you live that long and if you do, how much money will you need at that age?
As interest rates are so low I'd pay off as much as I could off my mortgage leaving a few pounds on it for your credit score and in case of emergency so you could take the over payment back. Any money left stick it into National Savings Bonds.

OP doesn't have a mortgage

As interest rates are so low I’d pay off as much as I could off my mortgage

Low interest rates is a reason not to pay off the mortgage.

Missed the bit where he said he didn't have a mortgage, sorry.
My theory on interest rates is that no matter how low your mortgage rate is, it's always higher than the interest rate the bank will pay on savings. Then there are the savings associated with a biannual (or however frequent) fee of potentially thousands for a new mortgage deal.

Plus the £5500 you pay yourself each year is tax free unlike a pension payment.

"£110,000 gives you £5500 a year for 20 years, so if you’re planning on retiring at 67 that will take you to 87. Not wanting to sound morbid but will you live that long and if you do, how much money will you need at that age?"

No problem being morbid that is the name of the game. My dad has a huge pension. He is in his 80s. prior to covid they would take maybe 10 UK holidays a year plus few pricey foreign one including wild life tours. Plus it'll pay for a care home if he needs one.

It's £122,000 for £5500 a year from 60 assuming no inflation

my life expectancy is 84

24 x £5500 = £13200 but I've paid tax on it so actually get less than that

The complication is inflation. In a crude spread sheet 1% inflation means they pay back £148,000

3% inflation is they pay me £189,346 both over the 24 years until 84.

Of course if I live longer then I'm quids in

A benefit of a commercial annuity that it could pay the income to my wife who would is likely to pay less tax

My question for tomorrow is can i pay this all out of untaxed income? Just take a huge salary hit but top up from savings

Low interest rates is a reason not to pay off the mortgage.

I don't get that

Say i has a mortgage of £100,000 at %1.5

I have a savings account with 0.5%

So every year it cost me 1% of £100,000 not to pay off the mortgage

So every year I do this I loose £1000. Or have I got this all wrong?

I hate this stuff and find it very stressful. But it has to be done and you've all helped. My current thought is that I might let the option for more income at 60 go as it is clearly more complicated than I thought

You don't have to have your capital in a poor rate savings account though. If you had your £100000 in a s&s ISA for a good period of time (e.g. 10 years), you'd be looking at st like 7% IANAFA

You don’t have to have your capital in a poor rate savings account though. If you had your £100000 in a s&s ISA for a good period of time (e.g. 10 years), you’d be looking at st like 7% IANAFA

Equally you could stick your money in a S&S ISA, Russia drops a bomb on Kiev and you loose 40% overnight and wait years to get back to normal...

Say i has a mortgage of £100,000 at %1.5

I have a savings account with 0.5%

So every year it cost me 1% of £100,000 not to pay off the mortgage

So every year I do this I loose £1000. Or have I got this all wrong?

But you have flexibility with £100k in an account eg say you lost your job tomorrow. With £100k instantly accessible you're in a better position than with no mortgage but £0 instantly accessible....

Low interest rates is a reason not to pay off the mortgage.

I don’t get that

It's a low rate so it's not costing much to borrow. The money can do something else and make more than it costs you. Property and Stocks & shares will comfortably beat your mortgage rate over the long term. You should get somewhere around 5-10% return. There's also a few other benefits like the tax advantages of a pension that footflaps mentioned earlier or the capital growth you get from property. I totally get why people want to pay the mortgage off, it's a big mental barrier, but it might not be the best financial decision.

Personally I like to have a mix. Helps take some of the risks out and adds some flexibility but still gives a decent return (most of the time).

Not sure about paying into a final salary scheme, but with a money purchase scheme eg SIPP you get the tax back on a one off payment or rather the scheme claims the 20% basic rate for you and if you’re a higher rate payer, you claim the other 20% yourself.

What I was meaning is that if your marginal rate is different while you're working compared to when you're retired, (eg, 40% > 20% ) it can be very cost effective to put money into a pension. Otherwise the tax benefit is limited to 25% tax free. The OP's money being after tax, I think there would be a 20% uplift applied by the pension provider, offset by paying tax at the marginal rate when taking benefits.

But that reminds me of something very relevant to the OP, which is the Annual Allowance. If your total pension contribution per year is above 40k, you pay silly tax on it. You can carry forward unused allowance from the previous 3 years. So if the OP's nominal pension pot has increased by more than £37,360 in the last 3 years, buying another £122,640 will go over the limit. I wrote 'nominal' there, that's because a final salary pension is deemed to have a nominal pot value of 20 times the annual payment, eg, if you have a final salary pension worth £15k per year, and with another year's service and any salary change it''s worth £16k, your nominal pot goes up from £300k to £320k (and you've used half your annual allowance).

Remember retirement has three stages.
Go go, go slow and no go.
You will use/need much less at the end as opposed to the start.
I'd rather £10k extra at 60 and my basic pension+state at 80+.

If in Scotland the McLeod ruling comes into play as well.

If in Scotland the McLeod ruling comes into play as well.

Its a UK wide ruling

https://www.teacherspensions.co.uk/employers/employer-faqs/transitional-protection/what-changes-will-a-member-see-and-when.aspx

Not a pensions expert but... private companies are closing their DB pensions due to cost and risk (mine closes in a week 🙁 ). Private companies haven't been offering purchase of years for a while as it's too expensive. A lot of actuaries will have done the sums for that quotation (inland revenue states simply 20x benefit for tax purposes). It's a public scheme so likely will be somewhat subsidised compared to private. It's likely to therefore be good value, so a decent investment.

The real question is whether there is something else that might be a more useful investment for you in the medium term, e.g., future education or a property for children, other schemes?

I came in to a substantial sum. It's now paying for my son's training, something he would otherwise not have been able to do. Of course a nice Pied a Terre/Air BnB, Narrowboat or future pension income might have been nice.

EDIT: I would also look into the issue of annual pension allowance of 40k, for a final salary if you are earning 1/80 of your salary, that's an effective contribution of (20x) 1/4 of your total each year. Now you probably aren't earning 160k as a teacher but 1/4 of you salary could be, say 15k, allowing only 25k per year into a pension fund (and tax on everything above that 25k). You'd not be able to carry forward enough years to a void a tax bill for self-assessment the following year.

Due to the limitations of contributions in a tax year, why not consider putting some into your wife's pension if you can. That way she'd be less affected in the event of your early demise

Edit: Also consider putting it into a private pension that doesn't reduce the payout to the spouse (That's why I moved mine from the company DB pension)

I'm still with "use it to retire early", no one every laid on their death bed and said they wished they'd spent more time at work.

I'm late-50's, my OH mid-50's - we're already winding down.

The tax contribution bit is interesting and needs investigation

I would also look into the issue of annual pension allowance of 40k, for a final salary if you are earning 1/80 of your salary, that’s an effective contribution of (20x) 1/4 of your total each year. Now you probably aren’t earning 160k as a teacher but 1/4 of you salary could be, say 15k, allowing only 25k per year into a pension fund (and tax on everything above that 25k). You’d not be able to carry forward enough years to a void a tax bill for self-assessment the following year.

Are you saying there is a limit to the amount of tax relief I can claim on my income. Or that I pay tax on the contribution from my savings if more than a certain amount?

I'm going to look into paying extra from my salary over the next 3 years

Don't worry I'm leaving wiggle room for a camper etc.

Thanks folks

Are you saying there is a limit to the amount of tax relief I can claim on my income.

You can only claim tax relief on tax you've paid. But its a bit complex. If you inherit money and then use carry forward to use up unused pension allowance from previous years then my understanding is you get tax relief on those previous years as well even though you didn't earn the inheritence. You should get tax relief up to your taxable earnings on those years. NB I may be wrong about this - used carry forward once about 10 years ago and can't recall the details. Plus I pay into a SIPP which is different to a final salary scheme.

Have you talked to your union about speaking to a financial advisor? They have people who are clued up on the specifics of the Teachers' Pension Scheme. There are tricks around skipping a month's payment to freeze the final salary calculation if you're stepping down in responsibility/time and they know them.

I think we've decided to retire as soon as practical - I've had a few colleagues die before getting to retirement, my mum didn't make it to 60 and a friend a few years older than us is about to move into hospice end of life care. Our kids should finish uni in the same year we turn 50 so asap after that, I think.

You get tax relief on 40k (or equivalent for final salary schemes). If you run over this you can carry over unused allowance from previous years. A lot of consultants in the NHS were bitten by this threshold and also the declining allowance for income above 150k, where the allowance tapers to only 4k. You can’t turn off the non-contributory pension contributions, so the tax liability was there. It was then better not to work to reduce the tax burden. The inland revenue values your final salary annual contribution at 20x the pension you accrue each year.

Thanks for all the help. It's been really useful. Weirdly I've realized that I quite like my job and I'm really looking forward to doing it part. Maybe I should go part time before 60?

I Spoke to the teacher pensions agency twice today and had a quick chat with a financial advisor

I probably won't be buying more pension at 60 for 2 reasons

1. I've left it to late. It will take the teachers pension people 10 working days to calculate my remaining allowances. Which is then past then deadline. I might able to work it out myself but probably can't

2. I probably don't want more income at 60. Once I take that pension at 60 I can't earn more than my salary at that point again, pension and income combined. This is already a constraint on how much i can work at 60. The worry is that the best bit of my job might not be possible unless I'm in 4 days a week.

@convert I realised this doesn't agree with what you said. It's a disgrace that it is not clear on the website

I asked the teacher pension agency and the financial advisor. My colleagues seemed to think when discussed at the end of the day that it agreed with what they had heard

I can take final salary pension at 60

I can the continue paying into my career average scheme which pays out at 67

But my pension at 60 plus income from my job cannot exceed the salary used to calculate my final salary pension

However if I opt to retire before I'm 60 I have to take both pensions at the same time. Both reduced by 4% for each year before normal retirement age

I also learnt today that most of my career average pension will be transferred back to final salary in the next few months due a ruling. The financial advisor said that getting out at 60 and taking the hit on the career average pension was a good as the career average would be so small at that point

I'm not a dim person but this stuff is so complicated. I think i have some reading to do at the weekend

But that reminds me of something very relevant to the OP, which is the Annual Allowance. If your total pension contribution per year is above 40k, you pay silly tax on it. You can carry forward unused allowance from the previous 3 years. So if the OP’s nominal pension pot has increased by more than £37,360 in the last 3 years, buying another £122,640 will go over the limit. I wrote ‘nominal’ there, that’s because a final salary pension is deemed to have a nominal pot value of 20 times the annual payment, eg, if you have a final salary pension worth £15k per year, and with another year’s service and any salary change it”s worth £16k, your nominal pot goes up from £300k to £320k (and you’ve used half your annual allowance).

I very nearly b0ll0xed myself with this over the course of two and a half years of big voluntary pension contributions. Not only would I have been taxed at a horrendous rate, it would have put me on the hook for self-assessment tax returns instead of PAYE *shudder*.

Fortunately I spotted just in time and managed to persuade my work to stop my additional voluntary contributions part-way through a tax year (normally verboten).

Due to the McLeod ruling there is the option to choose which teacher's pension to opt into for the period 2015-2022 at the point of retirement. Everything after this April goes to the career average, as I understand it. I'm really pleased about this ruling as it's an extra 7 years in the final salary scheme. I'm 51, and the idea of waiting until 67 as a NPA would be non starter. Given I might depart before 60 I've even considered withdrawing from the scheme from the end of the 7 year 'remedy period' because, as you say, there'll be a significant reduction of career average contributions if they have to be taken at the same time as whatever is in the final salary scheme. It is incredibly complicated.

I had an online meeting with an advisor from Wesleyan. She was great set out what I should do including opting out of the scheme for a month to protect my HofF salary from a few years ago. She said she’d probably talk to me again in a couple of years