Retiring thoughts - pensions

02 April 2015

Leader logoStephen Casey and David Binnie highlight the changes in the pipeline for teacher pensions.

From 1 April 2015, all members of the Teachers’ Pension Scheme will become members of the reformed scheme. It is important to be clear about which category of member you will be.

Some reforms will apply to all members, such as the revised contribution rates from 1 April.

Membership categories

‘Protected’ members are those who were 50 (or 55 for post-2007 members) or above on 1 April 2012. They will broadly continue under their current conditions in the final salary scheme.

‘Transitional’ members are those who were 46 years and six months or younger on 1 April 2012. They will transfer on 1 April 2015.

Those who were between 46 years and six months and 50 on 1 April 2012 are ‘tapered’ members who will transfer on a sliding timescale, according to their precise age. The most significant change is from a final salary to a career average scheme.

In the career average scheme, each year’s contributions are increased by inflation plus 1.6 per cent. The final pension is an accumulated total of the series of inflated accruals. There is no automatic lump sum but pension can be commuted to form a tax-free lump sum. This process is not applied retrospectively to pre-2015 contributions, which remain based on final salary.

Flexibilities

Despite the fundamental changes in the scheme there are still many opportunities for members to add to their pension beyond their normal contributions. The Teachers’ Pension Scheme has recently announced the flexibilities within the new Career Average Revalued Earnings (CARE) scheme.

Accrual rates

The career average scheme has an accrual rate of 1/57th of the pensionable salary each year. However, members are allowed to improve their accrual rate by making additional contributions to their pension. The new rates available will be 1/55th, 1/50th or 1/45th – instead of 1/57th of salary going into your pension pot. It is possible to elect for more to go into the pot and subsequently receive a greater pension.

In order to access a higher accrual rate for the year you must inform Teachers’ Pensions before the start of April for the year about to begin. Ideally, you should make the election before the end of January for a 1 April start. Your contributions will then be recalculated based on the higher rate and it will be deducted from your salary.

Once you make the election then you must continue with the contributions throughout the year. The increase in contributions for the different accrual rates has not yet been announced.

Buy-out of actuarially adjusted benefits

Members in the career average scheme can pay additional contributions, which allow them to retire before their normal pension age when it rises above 65 without their benefits being reduced. They can purchase one, two or three years of buy-out, depending on their normal pension age.

If you wish to elect for buy-out, you must make an election within six months of entering the career average scheme.

Additional pension

The third and final flexibility is the provision for buying additional pension to increase the pension paid out to you. You can buy the additional pension in sums of £250 and pay the additional contributions through your salary or, alternatively, you can buy them as a lump sum.

Under the career average scheme you can choose to mix and match the flexibilities as you wish and the total allowed for the coming year will be £6,500 additional annual pension income.

Other benefits

Important ancillary benefits, such as death in service grants and ill-health retirements, remain post-2015. The exact method of calculating these in a career average scheme may be different from the current final salary methodology but the benefits remain proportionally the same. The ability to take a pension before normal retirement age remains, subject to actuarial adjustment, as does the opportunity to take phased retirement.

Wider pension changes

Currently defined contribution scheme (‘money purchase’ or private pensions) benefits have to be taken in the form of an annuity with only 25 per cent available as a tax-free lump sum. The government is introducing greater freedoms in how the benefits are to be accessed and this will apply to additional voluntary contributions (AVCs).

Prudential Teachers’ Additional Voluntary Contributions

Some ASCL members have been in contact with us regarding their AVCs with the Prudential. The Prudential has recently announced a range of products that will become available to its members following the relaxation of the rules governing the pensions industry.

These products include a full drawdown of pensions accrued, with the first 25 per cent tax free, but also some very interesting and flexible schemes to meet individual needs that will allow access to pensions in different ways. The Prudential will be contacting its scheme members with details of the products available from April.

As always, ASCL strongly advises members to seek independent financial advice before taking any action.

Stephen Casey is ASCL Pensions Specialist and David Binnie is ASCL Pensions Consultant.