Before we begin, you need to know that your teacher pension cannot be drawn down early. Therefore, the only part of your pension that is relevant is the voluntary contributions you have been making to your AVC scheme. This scheme is the only way you could draw your pension savings as cash and therefore the only way that you may be subject to tax.
Why are we talking about tax?
Well, there has been a survey of more than 2000 over 55s by Legal and General. In this survey, there was something of a shock when a quarter of over-55s claimed they were unaware that they might be expected to pay tax on a pension fund if claimed as cash. This headline for once does not exaggerate the level of concern and the potential gap in knowledge. Indeed 27% of respondents believe they had tax-free access to the fund, 21% would be shocked at having to pay tax, and 27% think they wouldn’t pay any tax on a lump sum greater than a quarter of their savings.
If you have considered taking a lump sum from your teacher AVC scheme, you should know the truth about what tax burden you are likely to face. The fact is that pension withdrawals are only tax-free for 25% of the amount drawn. This means you will pay tax on the other 75%. This becomes a consideration when you want to draw from your pension fund.
Another consideration is whether your pension is being invested wisely. This would likely directly influence your decision about selecting to take the cash or not. The same survey revealed that almost 50% are unwilling to take any risk with a pension and 73% would be reluctant to take a big risk. Yet, the Financial Conduct Authority claim that many people have no idea where the pension is invested.
The challenge for those investing in pensions is to have a full understanding of the best way to manage the fund. It may be that taking the lump sum and facing the tax burden is going to help you feel comfortable, as you know the money is not at risk from mis-investment. However, if you knew where the money was invested and how this could result in a rise or fall in income, then you may be more willing to leave the money in the fund.
The answers to the survey are interesting, but they are not surprising. Not many of us spend the time we should considering our pension and planning our retirement, as human nature encourages us to turn a blind eye to old age. However, there is likely nothing more critical to a happy future than the security of knowing that you will be able to provide for yourself.
What does this mean for you?
As a teacher, you have the teacher pension that will offer a significant income but maybe not enough to keep you comfortable. If you choose to draw money from your AVC scheme, you need to be sure that you are prepared to pay the tax bill and if you will then have enough money to sustain your lifestyle. It is maybe time to seek some advice, to help you understand you better understand your options.
The content in this article was correct on 10th December 2018. You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on tax and teacher pensions. Please use the contact form below to arrange an informal chat with an adviser and see how we can help you.