MONEY MATTERS
Money Matters this issue focuses on a question that
we will all have to face at some point – retirement. Dorothy Lepkowska looks at the options available to teachers considering early retirement
T
O TEACHERS beginning their careers in their 20s, retirement can seem like a life-time away. But the years will fly by quicker than you think, and suddenly there you are, at 55, with some tough decisions to make.
In reality, teachers can retire at any age, but can only
start taking money out of their pension pot from the age of 55 onwards. Even then, this is not an automatic right and they must have agreement of employers – the school or local authority. The inclination by many teachers these days seems
to be to leave the profession early. The mortgage may already have been paid off, the children have left home and, anyway, teaching is a stressful job so why prolong it, particularly if you have already met your career goals? One important factor to consider is that your life
expectancy as a teacher actually exceeds that of the general population. You do not necessarily need to leave early to enjoy a longer retirement. “A teacher’s survival rate post-retirement is more
than five years longer than the national average,” explained Simon Rake, national sales manager with Wesleyan for Teachers. “Men can expect to live for 26 years, compared with 20 years for the general male population, while female teachers live an additional 28 years, compared with an average of 23 years. “Teachers at the tail-end of their career often want to
retire early because they are feeling quite stressed and think this will affect their life expectancy, but this isn’t necessarily something they need to worry about.” From the age of 55 teachers can take the main
benefits from the Teachers Pension Scheme (TPS) – assuming their employers’ consent – and any additional pension pots they have accrued in additional voluntary contributions (AVCs) or other “money purchase” pension plans such as personal pension plans, “free- standing” AVC plans, or stakeholder plans. TPS AVCs are linked to the TPS and are offered by
Prudential. Like other types of plan, they allow teachers to build up an additional pot of money through the payment of contributions which normally attract tax relief – for example, for a basic-rate taxpayer, making a £10 contribution would effectively only cost £8. Other money purchase plans are similar to AVCs,
but are not associated with the TPS and may be offered through a range of financial organisations. The funds arising from AVC and similar plans are
generally used at retirement to buy an annuity, although up to 25 per cent of the fund may normally be paid out as a tax-free sum. They are useful to have because you can take benefits from the age of 55, if necessary, while leaving your TPS untouched until normal retirement age, by which time that scheme will have accrued the most benefit. “AVCs offer quite a lot of flexibility because they
can be used to supplement your salary if you decide to wind down to retirement by working fewer hours,” Mr Rake added. The biggest concern facing most teachers who can retire early is the actuarial reductions that are applied
Case study
Mrs Jones has a calculated average salary of £25,000 that counts as her final salary, and at 55, has completed 25 years of service to the teaching profession. She has been paying into the TPS from the start. If she left teaching now and did not accrue any further years in the scheme, and took
her pension entitlement at 60-years-old, she would have two options. Mrs Jones could decide to receive a pension of up to £7,812 a year based on her contributions, and a tax-free lump sum of £23,437. However, if she decided she needed extra cash to renovate her house and visit her
son in America, she might wish to take the maximum lump sum of £41,849, which would leave her with a reduced annual pension of £6,278. However, if she took her full benefits now at age 55, the actuarial reductions of
retiring early would mean she received an annual pension of £6,038 and a tax-free lump sum of £18,116. If she wanted to withdraw the maximum lump sum of £32,346 now, this would leave her with an annual pension of £4,852.
to their TPS benefits, which can amount to more than 20 per cent of the pension entitlement. From the TPS, teachers have the options of adjusting their tax- free lump sum which can be increased by sacrificing pension income. Another misconception among staff approaching
retirement age is over the final salary aspect. TPS benefits can be calculated on the three
consecutive years in the past 10 when your salary has been at its highest. This could be the last three years if you had a promotion during that time to the senior management team, for example, but could just as easily have been earlier (it is also worth noting that you can also use your last year’s salary only if this equates to a higher amount). Taking this into consideration, you may be able to
reduce your hours if you do not want to work full-time until normal retirement age and still have your pension benefits worked out on a higher salary than which you are earning when you fully retire. This new option became available in 2007 after
the review of the TPS pension. It would allow, for example, an assistant head to hand over some of their responsibilities to a colleague and reduce their hours, without it affecting their pension on retirement. A teacher could draw on their AVC (if applicable)
or part of the TPS to make up any shortfall in income, but they will still be accruing funds in the TPS as they continue to work up to full retirement. Taking part of your TPS pension is known as Phased Retirement. You may wish to leave teaching because you
have “done your time” and yet do not feel quite ready to stop working altogether. One option is to get a job elsewhere, in a completely unrelated field, allowing you to get an income until you reach the scheme’s normal retirement age when you can draw the TPS without incurring any actuarial reductions by dipping into it earlier. Again, in this situation, the teacher may call on the AVC to supplement their salary if this is lower than they were earning previously.
Who can take a phased retirement?
• Phased retirement is available to those aged 55 and over who, with the agreement of their employer, change the capacity in which they are working.
• Your pensionable salary must be at least 20% lower compared to the average of your salary over the preceding six months. The reduction in salary, must last for at least 12 months.
• This could for example be a result of taking a part time post or taking up a post with less responsibility.
Simon Rake, National Sales Manager, Wesleyan for Teachers.
If you would like to discuss your phased retirement options or have other questions such as:
How many times can I use the phased retirement option? Can I take my pension and continue to work in teaching after 55 years of age? How is the average salary calculated to determine my pension? What other changes took effect from 2007?
Then call Wesleyan for Teachers now on 0800 316 6554 quoting reference 60487 to arrange a no-obligation personal review of your retirement plans and receive £20 of M&S vouchers*.
*Terms & conditions: For any teacher or related profession booking a no-obligation financial review by 30 December 2010. Offer based on one voucher per person and only 1 appointment can be booked during this particular promotion. No purchase is necessary. No alternative is available. Employees of
the Wesleyan are excluded.
If a meeting is cancelled you will not be entitled to the vouchers. You will be required to complete and return a confirmation card after your first meeting and £20 of Marks and Spencer vouchers will be sent to you within 14 days of the card being received by Wesleyan for Teachers.
Wesleyan for Teachers is a trading name of Wesleyan Financial Services Ltd, which is authorised and regulated by the Financial Services Authority. Wesleyan Financial Services Ltd is wholly owned by Wesleyan Assurance Society. Registered No. 1651212. Head Office: Colmore Circus, Birmingham, B4 6AR. Fax: 0121 200 2971. Website:
www.wesleyanforteachers.co.uk. Telephone calls may be recorded for monitoring and training purposes.
WFT-AD-47 09/10 Whatever your circumstances and plans for the
future, it is worth remembering that retirement can creep up on you, especially if you entered teaching later in life. Mr Rake added: “It is entirely possible that a teacher
who entered the profession in their late-20s will be retired from teaching for as many years as they worked
in schools, so they need to ensure they have made adequate provision for the future.”
SecEd
• Dorothy Lepkowska is a freelance education journalist. Money Matters returns in SecEd on October 14. If you have a question related to your personal finances as a teacher, email
pete.h@markallengroup.com
in association with
Look to the future
Your questions answered...
SecEd • September 30 2010
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