An introduction to the Teachers’ Pension Scheme
You may have entered the teaching profession for the holidays. However, you might also quickly realise that time off is a myth, and you only get a little more than other careers. Therefore, it is good news to know that the stories you have heard about the generosity of the Teachers’ Pension Scheme are well deserved.
If you enter the teaching profession now, you will be enrolled in the career average scheme. Long-serving teachers will either be in the final salary scheme or a mixture of the two. The career average is not as generous as the final salary scheme, but it may allow you to live comfortably in retirement depending on earnings and length of service. Each year you will earn a benefit of 1/57th of that year’s pay. This is index-linked, so it will increase annually with the Consumer Prices Index (CPI) plus 1.6%.
How much you pay depends on how much you earn. As you earn more, you will be expected to contribute more. Your employer will also contribute, and this also rises relative to your contribution.
Your normal pension age is 65, though this will increase to 66 by October 2020. At retirement, you can either take your pension as income, or as a mixture of income and capital.
Teachers’ Pension: buy extra years
As the scheme is regarded as being generous, it is a good idea to buy extra, which is a means of reducing the fraction from 1/57th by as many years that you purchase. You can purchase additional pension income in multiples of £250 a year. You can pay up to a maximum of £6500 a year into your pension, in addition to normal contributions. You can choose to pay in a single premium or as an additional monthly deduction from your salary. You have the option to select a faster accrual, with 1/45th, 1/50th or 1/55th of your earnings instead of 1/57th.
There is also the option of a separate pension scheme, such as the Additional Voluntary Contribution plan. As with faster accrual, you will be choosing to pay more each month. However, by selecting an AVC, you can take this pension at the same time or at a different time to the pension held in the main scheme.
Why pay more?
It may feel counter-intuitive to pay more. You pay a lot towards your teachers’ pension – buying more years seems a step too far. However, disposable income today could be handy in later years. With increasing life expectancy, you could potentially be retired for a long time. It would be a good idea to have some money stored away to live these years comfortably.
If you are confused as to which is the best route forward, it is a good idea to seek financial advice. How much flexibility you need with these extra payments makes a difference to the type of additional pension contributions you choose.
The content in this article was correct on 8th July 2019. 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.