Teachers’ pensions are changing from April, meaning that some of your clients may need to make a decision on the final calculation of their pensions.
While the new changes mean that some teachers may be looking at a reduced, more averaged pension, others may be able to choose against this eventuality. Here’s what you can do to help your clients make the right choice for their retirement.
Until recently, teachers were entitled to a pension that tapered depending on when they were enrolled on the scheme and how far they were from claiming their pension. These categories were:
‘Protected’ members: Active members before 2012 and were 10 years or less from claiming their pension
‘Tapered’ members: Members before 2012 and were less than 13 and a half years before pension age
‘Transition’ members: More than 13 and a half years from retirement age before 1st April 2012
‘New’ members: Joined the scheme on or after 1st April 2015.
The existing pension scheme allows members to take a final salary option. This meant that for members who have a retirement age of 60, their final salary would be calculated by taking an average salary, multiplying it by the years of service and then dividing this figure 80.
A lump sum equal to three times the pension would also be paid.
Under the new career average system, the pension amount is calculated differently. The average salary is calculated by taking the best paid three years out of the final ten years of pensionable work and aligning it with inflation.
A career average salary often comes to a lower pension figure, as despite the years of service, your pension is calculated by the best average salaries you accrued – meaning you could be better off taking more senior roles to get the best possible final pension.
Your clients’ pensions may be affected by these new changes depending on which category they fell under. Some members may not be impacted if they:
First joined one of the pension schemes on or after 1st April 2012
Have had a break in service of more than five years
Had no service between 1st April 2015 to 31st March 2022
Have already retired with a final salary pension in full prior to 1st April 2015.
However, if your clients had been working between April 2015 and March 2022, they will be given a choice as to whether or not they would prefer to take a final salary pension or a career average. Those who join the scheme from 1st April 2022 will have career average pensions.
With the changes fast approaching, you should look to raise this issue with your clients and to find out how their pensions may be affected going forward. Start by asking some of the following questions:
How will the pension change affect your plans for retirement?: It’s worth bringing the changes to their attention. If they are approaching their pension age and have been working in the last few years, they may be offered the choice to pick a final salary or a career average. With career averages often being lower, it’s important they have the right information to make the choice that is in their best interests.
Have you considered buying additional teachers’ pension contributions?: It’s possible for your clients to buy additional pension contributions. To increase their amount, they could pay a one-off sum or make deductions for their salary. Additional pension contributions can be bought in multiples of £250 per annum, which could be a good way for some individuals to quickly boost their existing pot.
Have you considered what will happen to your pension if you die?: These changes will also apply to the amount of pension paid out by an employer after death. If clients choose the final salary option, a final lump sum around three times plus a 1/160th share of the final average salary for each year of your service will be paid. For the career average arrangement, the next of kin will receive 37.5% of the career average pension accrued in addition to a further share of your prospective earnings.
Have you considered consolidating your pensions?: If your clients have numerous pensions from other jobs, they may be able to consolidate them into one pot, simplifying the process for planning their future.
When can I cash my pension?
Teachers can begin cashing their pensions at 60. Although it is possible to cash pensions at 55, it will be at a reduced rate, making it typically better to cash pensions at 60 or later.
What happens if I leave my teacher’s pension?
If a teacher has decided to take a career break or temporarily opted out from paying pension contributions, they can resume making contributions when they return to service. Although this will most likely result in a reduced pension average.
If your client has a pre-existing teacher’s pension left over from previous employment, this pension will remain until it is ready to start withdrawing at retirement age. Again, it may be possible to consolidate pensions.
What is an average teacher pension?
There’s no typical average pension for teachers. But, for a full-time teacher retiring at 60, with an average salary of £30,000, an individual would earn an annual pension of £9,375 per annum. However, this will be calculated differently in the future after they changes come in, so clients may be looking for up to date averages.
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