Your pension is one of the biggest assets you have. But how well do you really understand the Teachers’ Pension Scheme (TPS), your options and the benefits you have?
While the TPS is a generous pension scheme, offering a guaranteed, government-backed income in retirement that’s protected from increases in the cost of living, it’s not without complexity.
In fact, recent research from Wesleyan Financial Services found that as many as one in five teachers found information about their TPS benefits unclear.
So, what do you get from the TPS and how could this impact your retirement planning?
What Benefits Do You Get From The TPS?
Firstly, not all pension schemes provide a guaranteed income throughout retirement. That’s because the TPS is a defined benefit (DB) scheme whereby your contributions ensure you receive a set amount throughout retirement.
This is different from a defined contribution (DC) scheme, where your contributions are invested to provide a pot of money to draw on in retirement. However, this income is not guaranteed throughout retirement and will depend on investment performance.
You can also benefit from retirement options like:
- Taking early retirement
- Taking phased retirement while drawing up to 75% of your pension
- Exchanging pension income for a larger tax-free lump sum
- Working beyond normal pension age if you’re not ready to retire
This is in addition to other regular benefits like:
- Death in service grant and the ‘discretionary death grant’ if you die within five years of collecting your pension
- Ill-health retirement
It’s worth noting that not all these benefits are exclusive to the TPS. Many other pension schemes will also have some form of death in service grant, as well as ill-health and early retirement options.
Why Are These Options Important For My Retirement?
Having these options is important because they allow you to shape the retirement you want.
Early retirement
As a member of the TPS, you’ll be entitled to your full pension benefits when you retire at or after your Normal Pension Age (NPA).
However, you can choose to retire early, drawing your pension from age 55 (rising to 57 in 2028) – but you’ll need to ensure you’re able to fund a longer retirement. For some members, their retirement age will still be protected at 55.
As you’re claiming your pension early, you will receive less benefits than if you were to retire at your NPA.
That said, having the option to retire early is something that teachers value. If retiring early suits your personal and financial circumstances, it may be a good option for you.
Phased retirement
If you want to slow down your schedule but you’re not quite ready to retire, you might consider phased retirement.
Being able to phase your retirement is a benefit offered to teachers in the TPS whereby you can access up to 75% of your pension benefits. To be eligible you must reduce your pensionable earnings, or in other words, reduce your salary by at least 20%.
Teachers can reduce their pensionable earnings in one of two ways – either by reducing their working hours or by moving to a role with less responsibility.
You can apply for phased retirement between the age of 55 and 75. However, if you do opt for phased retirement prior to your NPA your pension benefits will be reduced.
Wesleyan’s recent research found that over half (52%) of the teachers they surveyed are likely to consider phased retirement.
Option to increase your tax-free lump sum
When you’re ready to claim your pension benefits, you’ll also have the option to take a one-off lump sum. This can be taken tax-free, up to 25% of the capital value up to a limit of £268,275.
If you joined the TPS prior to 1st January 2007 and you haven’t claimed your pension benefits, taken a repayment of contributions or transferred out of the scheme, you will be entitled to an automatic lump sum.
However, a lump sum is not automatically payable for most members. If you joined the scheme after 1st January 2007 you can choose to convert some of your pension into a lump sum.
For every £12 of lump sum you want to claim, you’ll need to give up £1 of your annual pension. So, if you want a lump sum of £18,000, you’ll have to give up £1,500 per year.
The maximum lump sum you can receive is equal to your annual pension multiplied by 30 and divided by 7. The capital value limit of up to £268,275 also applies here.
Working beyond Normal Pension Age
Your Normal Pension Age (NPA) will depend on which part of the scheme you are in. If you joined the Final Salary scheme before 1st January 2007, will you have an NPA of 60. If you joined between 1st January 2007 and 1st April 2015, you will have an NPA of 65.
If you joined after this date, you will be in the Career Average (CARE) scheme with an NPA equal to state pension age.
If you joined before 1st April 2012 and were still an active member on 1st April 2022, you will have both Final Salary and CARE benefits which have different NPAs.
Similarly if you joined between 1st April 2012 and 1st April 2015, you will have benefits in multiple parts of the scheme with different NPAs.
You can work beyond your NPA and draw your pension, but you must ensure that the combined income from pension and regular work salary doesn’t exceed the ‘salary of reference’ noted in your pension statement. If it does, your pension will be reduced to bring it in line with your salary of reference. This is known as the abatement rule.
To avoid breaching the abatement rule you will need to reduce your salary by at least 20% for a full calendar year. You might achieve this by either taking phased retirement or moving to a less senior role.
The abatement rule does not apply if you decide to work beyond your NPA in a role outside of teaching.
How Can You Shape The Retirement You Want?
If you’re ready to start retirement planning but aren’t sure where to start, it might be worth getting specialist financial advice.
A good financial adviser will take the time to get to know what’s important to you. They’ll probe to understand what you want your retirement to look like.
Specialist Financial Advisers at Wesleyan Financial Services are experts in advising teachers and those who work in education. They offer a range of services tailored to you, including comprehensive retirement planning.
It’s never too soon to start thinking about retirement. Starting early can help you to maximise the benefits of planning and investing to give you more options for life after the classroom.
Book a free initial discussion with one of their advisers to get a head start on your retirement planning.
Please note: Advice charges may apply. You will not be charged until you have agreed the services you require and the associated costs. Learn more about our charges here.
This article is brought to you by Wesleyan Financial Services. To find out more about us, visit our website www.wesleyan.co.uk.
Wesleyan Financial Services Ltd (Registered in England and Wales No. 1651212) is authorised and regulated by the Financial Conduct Authority. Registered Office: Colmore Circus, Birmingham B4 6AR. Telephone: 0345 351 2352. Calls may be recorded to help us provide, monitor and improve our services to you.
