I work for an independent school, earning £51,000 per year. My school is about to pull out of the Teachers’ Pension Scheme and put everyone into a private pension, the details of which it has not yet given us.
I am 46 years old and have been teaching for six years. My TPS pension is currently worth £4,000.
One of the reasons I went into teaching was because of the pension, and planning for a secure future.
I will probably still get the full state pension when I retire, but my wife, who works part-time, will likely get only the basic state pension. I expect I will have paid off our mortgage about two years before retirement.
Defined benefit: The Teachers’ Pension Scheme is based on the employee’s salary rather than their contributions
The TPS is about as gold-plated as they come these days, with a guaranteed amount paid for life, as opposed to the defined contribution system that offers a limited pot of retirement benefit, the value of which ebbs and flows with the stock market.
Given the pension changes, I have been looking at jobs at state schools. With my experience, I could expect a salary of about £35,000. It would, however, keep me within the TPS.
Would I be better off sticking it out in the independent school sector with a private pension, or sacrificing £16,000 per year to stay within the TPS? T.S
Harvey Dorset of This is Money replies: Sacrificing a higher salary now in order in exchange for a more comfortable income later in life is not an easy decision.
You face the choice between continuing to earn £51,000 per year and joining a less attractive defined contribution scheme, or taking a 30 per cent salary cut in order to keep a gold-plated pension that will pay you a wage for the rest of your life.
As you know, defined benefit schemes are now few and far between.
What this decision really comes down to, though, is the details of what your defined contribution scheme would offer you, were you to stay in your current job.
While the terms won’t be as favourable as your defined benefit scheme, there are other factors which could make it more generous than you might imagine.
Some employers offer salary sacrifice schemes which allow you to make a pension contribution before tax, for example.
Retirement pot: T.S is keen to maximise his savings, especially as his wife is unlikely to qualify for the full state pension due to working part time
Other employers will increase their contribution to match your own, meaning that you can maximise the amount you save into your pension.
If you already think you will be able to maintain your current standard of living on £35,000, you could stay in your current role and divert more of your salary into your retirement savings – which your employer would then add to.
Of course, another option that is open to you is to consider a role in an independent school that retains the Teachers’ Pensions Scheme, and in this way make the most of a defined benefit scheme whilst also maximising your salary.
I asked two experts for their advice on what is the best option for you take in order to set yourself up for the future.
Can you afford it? Billy Ambler warns that the difference between a state and private pension is important to consider
Billy Ambler, independent financial adviser at Flying Colours, replies: Clearly this is a very difficult question to answer without the full facts, so I can only provide high-level guidance at this point.
The TPS is one of the most generous pension arrangements in the country, with the added benefit that additional pension can be bought by members in multiples of £250 per annum.
However, a key aspect in this conundrum is whether you could afford to take a significant drop in salary in order to change jobs and remain within the TPS. Whilst a comfortable retirement is the end-goal, ensuring you have enough money to live on now is an extremely important short-term consideration.
At this point, I cannot assess the private pension scheme that your current employer is putting into place. As such, I cannot comment on the levels of annual contributions that will be made by them and you, nor can I comment on the investment choices that will be available through this arrangement. Both of these will have a bearing on how ‘good’ the scheme is.
However, I will explain how you might work out whether or not remaining in the TPS scheme is a good option for you.
A good place for you to start is to get an indication of your likely pension at normal pension age under the TPS. This depends on which scheme your benefits are in.
For career average benefits, it is either your state pension age or age 65, whichever is the later date. However, the normal pension age for final salary pensions is 60 or 65, depending on when you entered pensionable service.
You would need to get an estimate of what the pension could be, based on a combination of your TPS pension and the private pension arrangement from your existing employer.
You then need compare this to what the pension could be if you changed jobs and remained in the TPS until your normal pension age.
The next item to factor in is the difference in the salary from where you are employed today to retirement, versus getting a job which gives you continued access to the TPS. As briefly outlined earlier, having continued access to the TPS, but at a significantly reduced salary, will impact the accrual of pension.
The percentage of a £35,000 salary at retirement, versus a defined contribution pot that you’ve accumulated on a £51,000 salary, may look quite different in terms of the level of income either could provide.
Do the sums: Ambler suggests crunching the numbers on what kind of pension each option would provide
It is also important to consider that if you were to remain in your existing role with the higher salary, you could make additional contributions to the pension scheme which would further boost your retirement benefits.
It is possible that your existing employer will offer salary sacrifice, which means that your pension contributions will be taken from your gross salary and will benefit from lower National Insurance contributions as well as getting full tax relief at source.
You also indicate that your wife, who works part-time, does not have any pension provision. Another option to consider would be using part of the higher salary you would be receiving at present to make pension contributions for her.
Finally, it’s important to bear in mind that’s it’s difficult to predict what, or if, any future changes may occur. Even state sector pensions may not remain as attractive and generous throughout the remainder of your working life.
As you can see, this is a complex issue – you would be best to seek advice from a financial adviser to determine whether you would be better off staying with your existing employer or seeking a new teaching role where you could remain within the TPS, once all details have been provided.
Stick at it: Nick Nestbitt says the reader could make more money in their current role
Nick Nesbitt, private client partner at Mazars, replies: The Teacher’s Pension Scheme is one of the few remaining defined benefit pension schemes available. It offers teachers a guaranteed pension at retirement, based on their earnings throughout their career, with that pension increasing through retirement.
Defined benefit pensions are extremely costly to operate and most employers have moved to a defined contribution pension model, where the employer and employee contribute to an invested fund.
At retirement this can be used to produce an income, typically an annuity or drawing down on the fund.
The key difference is that a defined benefit pension provides a known future, whereas a defined contribution pension and the income it provides are much less certain.
Given how valuable future financial certainty is, where someone can remain in a defined benefit position, we’d encourage them to think very carefully about moving away from that.
In this case the reader would need to give up a considerable amount of their salary to stay in the TPS. As such, it’s a case of weighing up if they could use their higher salary in the current role to generate a pension that could be as good or better than the TPS being lost.
Given how valuable future financial certainty is, where someone can remain in a defined benefit position, we’d encourage them to think very carefully about moving away from that
With a gross salary of £35,000 and a contribution rate of, for example, 8.6 per cent, the reader would have an effective gross salary of £32,000.
To be in the same salary position in their current role, the reader could put £19,000 of their present salary into a defined contribution pension. This amount may also be boosted if the school agreed to pass on some of its National Insurance Contribution and other savings.
Let’s assume this is the case and the school contributes 10 per cent. This means that if the reader remained in their current role, they will see £24,100 saved into their defined contribution pension each year.
I will now turn to what they are likely to receive from each of the two pension options.
For each year in the TPS with a £35,000 salary, the reader would add £614 to their pension. Due to the way the pension increases each year, this equates to £857 of annual pension income (in today’s terms) when the pension becomes payable at age 67.
The key question here is whether the defined contribution pension could produce the same, or better, in terms of retirement income.
The best way to look at this is how much it would cost to buy £857 per annum of equivalent annuity income at age 67. Indicative quotes show this income can currently be purchased for around £18,170.
This would suggest that there is a good chance the reader could achieve more income in retirement by remaining in their current role and contributing heavily to the new defined contribution arrangement.
The above calculations take no account of any investment growth, and if they could achieve investment growth of, say, 2 per cent per annum ahead of inflation, the fund could provide an annuity income of broadly double that of the TPS.
However, coming back to my earlier point, there is much value in having the certainty of a DB pension.
If this is something the reader values highly, they may choose the lower salaried role to have such certainty. Naturally, we would encourage any individual in this position to take financial advice before taking any action.
It’s also well worth the reader and his wife checking her state pension record, as it may be worth making voluntary contributions if she isn’t far off full state pension entitlement.
> How to top up your state pension to boost retirement income
This post first appeared on Dailymail.co.uk
