Should I buy extra teacher's pension?
|Retirement | Occupational Pension
Asked by suzhol, submitted
18 July 2011.
I am a 47 year old femaIe part time teacher. I am thinking about investing a lump sum of abou £20K as additional pension and have been quoted £680 for each £250 pension. My problem is that i have no idea if this compares favorably with buying pension benefits elsewhere. If i dont invest in my pension i would probably put the money into national savings.
Please could you advise how the TPS quote compares with other companies, if indeed i am able to purchase pension income in this way.
Answered by Justin on 19 July 2011
If you want the certainty that for every £1 you contribute you’ll get a fixed amount of pension income at retirement, then the teacher’s pension scheme is your only option. All other routes will depend on investment performance, interest rates and/or pension annuity rates.
I’m concerned that the quote you’ve been given of £680 per extra £250 of pension at retirement is incorrect (it sounds far too cheap). Using the calculator at http://www.teacherspensions.co.uk/resources/calculators.htm it looks like the cost should be £3,550 per £250 for a female aged 47 due to retire at 60 (£2,810 if 65).
Anyway, to give you a very broad idea, £250 of annual inflation-linked pension from age 60 would cost around £8,065 based on current pension annuity rates for a female non-smoker. To grow £680 today into £8,065 over the next 13 years would require an annual average return of 21% - a very tall order. If we use £3,550 (the correct figure I think) it falls to 6.5% - a more achievable annual investment return but certainly not guaranteed (please note my figures are only intended as a rough guide!).
If you don’t mind the inflexibility of tying up the money until retirement I’d be tempted to consider buying extra pension for the simple reason it’s a reasonable deal and you’ll know exactly what you’re getting. Plus, you’ll get tax relief on the money used to buy extra pension, so each £100 contribution will cost you £80 (or £60 if a higher rate taxpayer).
However, bear in mind the extra pension might prove less than worthwhile if you have a below average life expectancy (although it’s possible to build a spouse’s pension into the extra contributions). Plus pension income in retirement is taxable. There is also the risk that the benefits from the teacher’s pension scheme will change in future, although I very much doubt this would apply to existing service or extra pension already purchased.
If any of the above issues concern you, or you just want greater flexibility, then by all means consider alternatives. National Savings Index-Linked Certificates and cash ISAs are both low risk tax-free options.
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Comment by suzhol at 7:34pm on 19 Jul 2011:
Yes thankyou for seeing through my typo, you have explained what sort of value it represents, and for me i think adittional pension is a good option. I will not now do this as a lump sum as i may as well benefit from the tax relief and save over time or would i also get tax relief on a lump sum?
I was also wondering if the amount of pension bought in this way is index linked as is the case with NHS pensions?
Thanks again for your clarity.
Comment by justin at 12:50pm on 20 Jul 2011:
Yes, income tax relief on contributions applies to both lump sum and regular payments, so the choice is yours.
The one consideration is that tax relief is limited to contributions of no more than the higher of £3,600 and your annual earnings (capped at £50,000) during the current tax year (6 April 2011 to 5 April 2012). So if your earnings are less than £20,000 for this tax year I'd scale back your lump sum contribution accordingly, you can always contribute the rest next year.
The extra pension you buy will be linked to inflation in the same way as the existing teachers' pension scheme. You will also be able to take some of the extra pension as a tax-free lump sum at retirement, again as per the main scheme.
The Teachers' Pensions website has a useful leaflet covering extra contributions here.