Actuarial Reduction And The Teachers’ Pension
There is something you need to know about actuarial reduction & the Teachers’ Pension. This is the impact on your pension when you decide to take early retirement. My Pension Online (MPO) offer an unreduced forecast. This means if you are planning on finishing your career before the normal pension age, whether this is 60, 65, or 66+, depending on the scheme of which you are a member, then a reduction will need to be applied. The reason you will need to speak to an advisor to see how it impacts you is that all the schemes have different actuarial factors.
Who is this Actuary?
What? You say. Actuarial reductions & the teachers’ pension, who is this actuary person. Let’s introduce you to the role of the actuary and their role in determining your pension, and indeed any life or critical illness insurance you receive as a teacher.
The actuary assesses risk in pensions, on behalf of the pension company. If you live for a long time with a high pension, you are a risk to a pension company, mostly because they could run out of money if you continue to live and draw on your pension. Therefore, the pension company needs to know two things a) how much should they charge you in pension contributions and b) how long you will live into retirement.
Essentially, it is the job of the actuary to predict the future. They are not psychics or magicians. The actuary will use statistical trends to make predictions.
So, why apply reductions?
There is a myth in teaching that we will likely live only 18 months after retirement, which is why the government can afford such a generous pension scheme. Somewhere, someone decided that this must be the reason that actuaries agreed to the risk of a healthy pension for teachers.
However, according to a BBC report, teachers are part of an above average social, economic group. This means they are likely to live on average 18 years beyond the age of 65 years old if you are a man. If you live an affluent life, then you are likely to live even longer, something closer to 25 or 30 years. This means if you retire earlier you are more likely to have money; actuarial data would suggest you would live longer and therefore you would receive benefits for longer. This means they need to apply a reduction to the pension to ensure that the scheme continues to be viable.
A slight pause for thought
An interesting side thought in this story of the actuary and the teacher is what this all means about the viability of the pension scheme. If the presumption that the pension is generous because the teacher will not live long enough to claim much money is wrong, then how can it afford to be so generous? I bet you are glad that you showed interest in actuarial reduction & the Teachers’ Pension.
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 actuarial reduction and teacher pensions. Please use the contact form below to arrange an informal chat with an adviser and see how we can help you.
