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Home/News/Teachers Pension/Teachers’ Pension Scheme: what is a hypothetical calculation?

Teachers’ Pension Scheme: what is a hypothetical calculation?

07/09/2019 Racheal Smith

The question of hypothetical calculations is only relevant to members of the Teachers’ Pension Scheme in the Final Salary Scheme, or if you are a member who will transition between schemes.  You will also have experienced a break in service.  If this describes your situation, this guide will inform you of how your service and therefore, your benefits are calculated.

Reckonable service

Reckonable service is defined as the service that counts towards your benefits in the Final Salary Scheme.  This is either 80ths or 60ths, dependent on when you started teaching.  Your benefits will be calculated based on this reckonable service, which is counted in years.  The final number of years accrued is called your reckonable calculation.

Reckonable calculations

There are two methods of coming to this reckonable calculation.  The Teachers’ Pension Scheme undertakes both ways, and the one most beneficial to the teacher is applied to the pension award.

Method A: this uses the full-time salary in the final 365 days of service.  If your salary in the last three years exceeds your previous year’s salary by 10%, or by a fixed amount that is adjusted annually, then your benefit will be restricted by whichever is higher.  In other words, your calculation will be dragged back to account for an impressive end of career salary.

Method B: this will use the average of the best consecutive years of revalued salaries from the last ten years of pensionable service.  This means, if you step down from Deputy Head Teacher (DH) in the last ten years of pensionable service to work as a classroom teacher, your best three years as a DH will count in the calculation of your pension.

If you left teaching before 2007, then your pension is calculated as the best 365 days in the last three years of service.

Hypothetical calculation

Hypothetical calculations apply to those who served as a teacher, then left for a period but returned later.  To qualify for a hypothetical calculation, you will have needed to accrue two or more years’ service in total.  There are two hypothetical calculations: unrestricted and restricted.

The unrestricted calculation is based on the total reckonable service at retirement but uses an average salary calculated up to the date of the break in service.  Once benefits have been calculated, Pension Increase (PI) is added from the deemed date to the payable date.

The restricted calculation is when the average salary up to the date of the break is higher than that after the break.  Pension Increase (PI) is then only added to that service within the Final Salary Scheme accrued before the break.

So, two calculations will be made:  1. average salary at the time of the break, 2. average salary at the time of retirement.  If 1 is larger than 2, then the restricted calculation applies.  If 2 is larger than 1, then the unrestricted hypothetical calculation is used.

I’m in the Career Average Arrangement

These calculations do not apply to people in the Career Average arrangement.  If you are a transitioning member, then your pension could be impacted by a hypothetical calculation if you take a break in service.  The different possible scenarios here make it essential to consult an independent financial advisor who can help you understand the calculation that applies to you.

The content in this article was correct on 26th August 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.

Posted under: Teachers Pension

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