Last week I caught up with one of my oldest friends called David. David is a Geography teacher, and while I often make fun of him for colouring in maps, he is an outstanding teacher. Like many of us, he wants to retire and has dreams of moving to the countryside. The problem with retirement is that you cannot save for it quickly.
For the average person, you’ll need substantial funds. While it’s possible to retire a millionaire, it’s not something that is going to happen quickly. David and I talked about retirement and more specifically, how much he needs to retire.
One of the questions that came out of the conversation was around teachers pensions, and when can teachers retire, and how much will their teacher’s pension be worth on retirement?
When can David Retire?
As a teacher, you must have completed two years’ service to be eligible to receive benefits from the Teachers’ Pension Scheme. It doesn’t matter whether this was part of a final salary scheme or an average career arrangement or even a combination of both.
Once completed, you can draw on your teacher’s pension from the age of 55, unless your granted ill-health benefits. Remember, this is at the time of writing, and there are plans to increase this age to 57 in 2028 and then going forwards, keep it ten years below the state pension age.
What Is The Teachers’ Pension Scheme
The teachers’ pension scheme was in the ’50s as a way for teachers and their employers to pay into a fund that in turn pay them a monthly income to help pay for their retirement. It’s a Defined Benefit Scheme, registered with HM Revenue and Customs that is calculated based on your salary amount and the number of years of service.
While the original teachers’ pension scheme was set up in the ’50s, significant changes were made that came into effect on the 1st April 2015. These changes affect how much you get and when you can access it, and therefore how much your monthly retirement income is depending on when you joined the scheme.
Types of Teachers Pension
In 2015, the laws surrounding teachers’ pension changed and as a result, how much you will get, and when you can access it depends on when you joined the retirement plan and how far you are away from your retirement date. Typically, you’re classed into one of four different groups;
- Protected – If you were working and paying into your final salary scheme before 1st April 2012, and will retire in 10 years or less from your normal pension age, you’ll be on the old final scheme.
- Tapered – If you were working and paying into your final salary scheme before 1st April 2012 and will retire in 10 years, but less than 13.5 years away from your normal pension age, then you’re a tapered member. In this situation, you will move into the average career arrangement on a date which is determined by your age on 1st April 2012.
- Transition – If you were working but more than 13.5 years away from your normal pension age on the 1st April 2012, then you’re classified as a transition member, and your pension will be as per the average career arrangement.
- New Member – If you started working after the 1st April 2015, you will join the Average Career arrangement and start to build up your pension. Generally, the Normal Pension Age for new members is currently 68.
How Much Do You Contribute To Your Teacher Pension Scheme
Like a SIPP or a company pension, the teacher pension scheme works by full or part-time workers paying a percentage of their gross salary into their pension each month. Their employer will also add in a contribution and the government will you tax relief on both your company’s contributions and your own. The amount you contribute on a monthly basis depends on your earnings, but for the 2020-21, the levels are as follows;
- £0-£28,169 7.40%
- £28,169-£37,919 8.60%
- £37,919-£44,961 9.60%
- £44,961-£59,588 10.20% £
- 59,588-£81,255 11.30%
- £81,255+ 11.70%
How Does Your Pension Pot Grow?
Unlike a standard SIPP, you’ll have no control on where or how your contributions are invested. This stops any concerns of surrounding pension surprises when you come to retire and allows you to accurately predict what your monthly pension payments are likely to be when you come to retire.
With a final salary scheme, your pension is based on your final salary and the amount of time that you’ve spent working. As such, technically you don’t have a pension pot. With an average career scheme, you will accumulate a pension pot of 1/57th of your earnings (including overtime). Each month, this amount will then be increased through a process called ‘indexation’, which revalues your pension so that it keeps up with inflation.
The current rate of revaluation for 2020 to be applied the Career Average arrangement is 3.3% for active members and 1.7% for deferred members. As an example, if between the 1st April 2020 and 31st March 2021 I was working as a teacher earning £40,000. My pension contribution for this year would be £40,000 x 1/57th, which equals £701.75. £23.15 would be added for the year for evaluation, and indexation would then be applied to this amount.
What Age Can You Start Receiving Your Teachers Pension
In the UK today, unless your granted retirement due to your health, you must have completed two years’ service to be eligible to receive benefits from the Teachers’ Pension Scheme. Once completed, it’s possible to take early retirement and draw on your teachers’ pension from the age of 55, however, you’ll receive an actuarially adjusted pension and lump sum if applicable.
If you’re not going to take early retirement, then you can access your pension at your Normal Pension Age” (NPA). This depends on the type of pension you have and when you started paying into it.
- Protected Member – have an NPA of between 60 and 65. If you started your pension before the 1st January 2007, your NPA was 60, for after, it’s 65. There are a few terms, but the key requirement is that you have not had any career breaks for longer than five years.
- Tapered and Transition members – will either have an NPA or 60 or 65. Much like above, if you started taking your pension before the 1st January 2007, your pension age is 60, otherwise it’s 65.
- New Members – have an NPA of either your state pension age or 65, whichever is the later date. Realistically, if you have recently joined, you’re likely to be retiring at 67 or possibly later.
How Much Is Your Teachers’ Pension?
If you want to know how much your pension will pay you each month, you can easily work it out yourself, or you can access your online pension account via the Teachers’ Pensions website. The most important thing to remember is that your pension will increase each year in line with inflation. In 2020, 1.7% will be applied to pension payments which takes effect from the 6th April 2020.
To view your predicted pension payments, you need to register for a My Pension Online (MPO) account. This is a secure portal that allows you to check and manage your Teachers’ Pension online in a variety of ways including:-
- View your Benefit Statement
- Change any personal information
- Increase payments
- Nominate a beneficiary
Final Salary Scheme
If you’re in a final salary scheme, the amount you’ll receive is based on your average salary throughout your career, the number of years of service and how old you are at retirement. If you’re retiring age 60, you get a rate of 1/80th, while at 65 its 1/60th.
Once this is information is collected, your calculation is worked out as follows. I have been working for 40 years and retiring aged 65 with an average career salary of £30,000. My calculation is £30,000 x 40 / 60 = £20,000 per annum.
What happens to my pension if there is a break in service? It really depends how long you had a break for, and when you returned.
- If you were in a final salary scheme with an NPA of 60 and had a break of fewer than five years, nothing changes.
- If it’s over five years with a return after 1st January 2007, then you get a split pension where the years before your break give you an NPA of 60, and the years after your break, an NPA of 65.
- If you’re a protected or a tapered member and you have a break for less than five years, nothing changes. If its more than five years, you simply move into a career average plan with an NPA of 65 or whenever your state pension is due.
Is It Possible to Increase Your Contributions?
Yes, it’s possible to increase your contributions which in turn have the effect of increasing your pension rate upon retirement or give you other benefits such as the possibility of taking a lump-sum.
- Increase Contributions – While its subjected to a maximum amount which is reviewed each year you can increase your contribution to a rate of up to 1/45th. In the example above, if I was a teacher earning 40,000, my pension contribution for this year would be 40,000 x 1/57th, which equals 701.75. If I increased my contribution to 1/45, my yearly pension contribution would be 888.88.
- Early Retirement – Rather than have a higher monthly retirement income, you can pay higher premiums and retire earlier. In this situation the Normal Pension Age (NPA) is over 65 would be reduced to 60 or even 55 years old, however, you need to make this decision early as you only have six months from entering pensionable employment to make an election, after that, you cannot elect to purchase this flexibility.