It’s about this time of the year, that many teachers who are retiring in the summer will need to make the decision on how they will take benefits from their teachers pension – including the pension lump sum.
You can’t change your mind once you’ve submitted the application to Teachers Pensions so it’s important that you make the right choice.
If you have final salary service that includes service before 1 January 2007 (the 80th Scheme) you’ll receive an automatic lump sum that’s equal to three times your teachers pension and will be free of tax when you draw your pension benefits.
Members of this version of the scheme can also choose to sacrifice some of their pension income to receive an enhanced lump sum which is greater than the standard lump sum – this is known as a commutation.
If you only have final salary service after that date (the 60th Scheme), or have any career average service, you’ll not receive an automatic lump sum for this part of the pension when you take your benefits. Instead you can choose to commute some of your pension income to receive lump sum benefits.
The commutation factor in the Teachers Pension is 12:1 – this means that for each £1 of pension income that you give up you’ll receive an extra £12 of lump sum. There are limits to how much income you can commute and the maximum amount of lump sum that you can take this way is equivalent to 25% of the total value of your teachers pension benefits.
As commutation factors go it’s not especially generous and whilst the extra lump sum may look tempting, we would always urge teachers to think carefully before giving up a guaranteed indexing income.
Not all situations are the same however and it can sometimes make a lot of sense to commute income.
Teachers Financial Planning are independent financial advisers that specialise in retirement planning for teachers. We have helped many teachers decide on the best course of action when taking benefits from the teachers pension.