This month we are exploring the potential consequences of a break in service on your pension. You may feel exhausted or just be looking for a new challenge. However, your financial security in retirement is tied to your decisions now, and here we explore what happens when you break the salary link.
What is the salary link?
There is a salary link where you have benefits in both the Final Salary and Career Average arrangement. This means that the salary you earn in the Career Average arrangement is also used to calculate your Final Salary benefits. The link remains if you are an active member of the scheme or take a break from the scheme of fewer than five years. A break of five years is considered a disqualifying break, and the link is broken.
How this impacts you and your pension depends on your member status.
If you are a protected member, you have retained your status in the Final Salary scheme. If you leave teaching for more than five years – or pensionable service – you will be re-enrolled in the Career Average arrangement on your return to teaching. Return before these five years, and you will re-enter the Final Salary arrangement.
If you have a disqualifying break of more than five years and return to teaching, you too will rejoin in the Career Average arrangement. Regardless of whether you have reached the transitioned date laid out to you had you stayed in pensionable service, you will return as a member of the Career Average arrangement. You have broken the salary link; therefore, you rescind your status as a tapered member.
If you incur a disqualifying break, your salary link will also be broken as a transition member. While you are out of service, your Career Average benefits will continue to increase at the rate set by the annual Treasury order. If you remain in service, this increases by an additional 1.6%.
If you return before the five years, your pension will increase throughout at a higher rate.
What does this mean in practice?
Knowing the financial consequences of a break in the salary link is difficult to quantify, as it differs member by member. It is a good idea to explore how a break in service of more than five years will impact your financial security in retirement with an independent financial advisor.
The content in this article was correct on September 26th, 2021. You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on pensions for teachers and non-teachers. Please use the contact form below to arrange an informal chat with an advisor and see how we can help you.