Avoid running aground in your retirement, Ian Thomas

Avoid running aground in your retirement

Ian Thomas points out some important pension marker buoys

Do you have a clear idea of how and when you will be able to stop working, with enough income to enjoy, rather than endure, your life after teaching? If not, then you are probably in the majority. The Teachers’ Pension Scheme has always been seen as one of the main financial benefits of the profession and so it is often assumed that retirement will take care of itself.

But, following the major changes to teachers’ pensions that were introduced last year, is this relaxed approach still a good idea? Given ever-rising life expectancy, the decisions you make today regarding your pension are likely to affect your lifestyle for 25-30 years, or even longer, following retirement. Do you understand how the changes will affect your own pension situation and the options you have to improve it?

One size does not fit all

The first thing to recognise when it comes to teachers’ pensions is that it is no longer accurate to talk about the Teachers’ Pension Scheme (singular). Depending on when you first joined the profession, your age and whether you have had any significant gaps in service, you may in fact be a member of up to three separate but inter-linked teachers’ pensions schemes simultaneously. Although teachers’ pensions contributions are calculated in the same way for everyone in the common room, differences are emerging in what those contributions will actually deliver, in terms of benefits, when it’s time to retire.

Teachers who are close to retirement will not generally be affected by the changes and will remain in their existing scheme, but as a rule of thumb, if you are under the age of 50, then your normal pension age (NPA) will no longer be 60 (or 65 if you joined teaching after 2006), it will instead be aligned with your state pension age.

Another important change relates to the way that pension benefits are calculated, with the new scheme using a career average revalued earnings (CARE) approach. However, any entitlements you built up in the earlier schemes, before the changes were introduced, will retain their link to your final salary at the point of retirement.

So are teachers’ pensions still good value?

My analysis finds that for most teachers the CARE scheme is likely to offer a pension income that is more or less equivalent to what would have been received under the previous schemes, assuming retirement at age 60. Furthermore, if you choose to work past this age, then the pension income under the career average arrangements could well be higher, a conclusion that may come as a surprise to many.

There are, however, some important caveats to these very general findings. Although the CARE scheme is arguably fairer – its benefits will more accurately reflect your overall earnings and contributions throughout your career – for younger teachers on course to become higher earners the new

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scheme will clearly not be as beneficial. Additionally, unlike the pre-2007 final salary scheme, the CARE scheme does not offer an automatic tax-free lump sum.

Even so, given the economic challenges of a rapidly ageing population, the new scheme is, in my opinion, still very generous. Projections from the Office for Budgetary Responsibility indicate that the net cost to the taxpayer of public service pensions is set to rise from £0.2bn in 2005/06 to £16.7bn in 2020/21 (excluding the cost of the employer contributions).

Most of these taxpayers’ own final salary schemes have now been replaced with vastly inferior defined contribution alternatives and in contrast to the 16.48% contribution to teachers’ pensions made by every school, the standard employer contribution to private schemes is set to reach just 3% of salary by April 2018.

Retirement planning considerations

For everyone taking retirement, teachers’ pensions benefits will be determined by length of service and final average salary. So, by way of forward planning, it’s a good idea to check that all your service has been correctly recorded and that you understand exactly how your final average salary is likely to be calculated.

Increasingly, retirement is now seen as a process rather than a one-off event, so you may also like to explore how you could step down from your current position to a less responsible post or to a part-time role. Teachers’ pensions offer a formal ‘phased retirement’ option, or another common approach is to