What is the Teachers’ Pension Lump Sum?
If you entered teaching on or after 1st January 2007, you are part of a Final Salary or Career Average arrangement for your teachers’ pension. These schemes give you the option to convert some of your teachers’ pension amount into a lump sum. If you make this choice, then you will give up £1 of your annual pension for every £12 of the lump sum you receive. The good news: the lump sum is not subject to income tax when your annual pension is considered earned income for tax purposes.
What sort of Teachers’ Pension amount would I get as a lump sum?
The maximum amount you can receive for your lump sum is 25% of the total value of your teacher benefits. By taking the maximum 25%, you could be leaving yourself short in terms of income into retirement. Therefore, although the lump sum could seem appealing, it also requires much thought about your long-term plans.
You can calculate the size of your lump sum using the Teachers’ Pension calculator. You may be surprised to know that your lump sum could exceed £150k. Checking out the pension’s calculator is therefore worth your time and your attention.
There are lots of different ways that your annual payment and your lump sum can be impacted. If you have taken gaps in service or if you entered teaching before 2007, for instance. Therefore, it is essential to use the Teachers’ Pension calculator to explore your situation.
What are the best ways of using this Teachers’ Pension lump sum?
It is now possible to see that the lump sum you could be talking about is significant. It is not the sort of amount that you would want to fritter away or could blow on the holiday of a lifetime. There is potential for some shrewd investment or purchase choices that could significantly enhance your quality of life.
Here are just three potential options, you could:
Use it to pay off your mortgage and so live without worry about monthly payments. This could make your annual pension enough to live on without the need to consider working. you could even invest it in other property and use the rent from this property as an additional income.
Invest it yourself. You may not be happy to leave your pension fund in the hands of someone else. You may be prepared to take more risk, or you may want to take less. You could choose an income drawdown plan, which means you add to your annual pension but in a scheme that you have chosen.
Place it in a savings account. The current interest rates do not make this a profitable option, but it is safe. You will earn some money on the amount, and it would be available for use when you need it.
How to use your teachers’ pension is complex. There are many considerations, not least how you are going to afford to live each year in your retirement. This is a brief introduction to the possibilities, which could inspire you to seek further advice.
The content in this article was correct on 19th February 2019. You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on investment possibilities. Please use the contact form below to arrange an informal chat with an advisor and see how we can help you.