Financial planning guide For teachers who are approaching retirement

Transcription

1 Financial planning guide For teachers who are approaching retirement Financial planning guide 1

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3 Contents Think ahead 4 When did you join? 5 Different rules, at different times 6 What kind of member are you? 6 Protected member 6 Tapered member 6 Transitional member 6 New member 6 Your monthly pension contributions 7 Pre 2007 members 8 The benefits 8 How much pension will I get? 9 Final Average Salary 9 Pension Commencement lump sum 10 Taking a higher lump sum 10 Post 2007 members 12 The benefits 12 How much pension will I get? 13 Final Average Salary 13 Taking a Lump Sum 14 Early retirement 15 What happens if I wish to take part of my pension but carry on working? 16 When and how do I apply for my pension? 17 What happens if I want to go back to teaching? 17 How can I top up my benefits? 18 What happens if I m too ill to work? 20 What if I die? 20 What other financial plans should I be making? 21 Where do I go for more help? 21 3

4 Financial Planning for teachers and their families as they approach retirement Think ahead At Teachers Assurance, we have been helping teachers for many years and have huge respect for your chosen profession, the contribution you make, the individual successes you achieve, the challenges you overcome and the sheer hard work that you put in. We aim to apply the same level of professionalism, diligence and commitment in our work with you as you do in yours. Our experience, gained over 137 years of providing financial planning support to the teaching profession, tells us that many teachers have a lot of questions about their pension scheme and its associated benefits. This guide is designed for members of the Teachers Pension Scheme and seeks to answer the most common of those questions, provide you with a simple explanation of what you can expect and point out any shortfalls as well as the financial planning decisions you may be considering. We have tried to make this guide applicable to all teachers who are eligible to join the Teachers Pension Scheme, but individual circumstances may be different to the typical examples that are used. If you require further information or guidance, please contact Teachers Pension Scheme themselves, your union, or a financial adviser (you may have to pay a fee for their services). In this brochure, we will try to provide you with answers to the following questions: What are the benefits of the Teachers Pension Scheme? How much pension will I get and what lump sum can I expect, if any? How can I top these benefits up? What happens if I wish to retire early? What happens if I cannot work due to ill health? What should I do to protect myself and my family from the consequences of ill health? What happens if I die before retirement? What if my benefits are not enough - what should I do to protect myself and my family? What other financial plans should I be making? Where do I go for more help? 4

5 When did you join? The Teachers Pension Scheme is (TPS) known as a final salary scheme. This means that you contribute towards the scheme each month in return for a pension at retirement, which is based on your salary and your length of service. If you joined the TPS before January 2007: you are in the 80th Final Salary scheme and your normal pension age (NPA) is 60. If you joined the TPS after January 2007: you are in the 60th Final Salary scheme and your normal pension age (NPA) is 65. Both schemes are defined benefit schemes that will provide a guaranteed, regular income for life. Pre /80th Scheme You receive pension under this scheme if you: Started teaching full time before 1st January 2007 Were part-time and elected to join the pension scheme, if you started teaching before 1st January 2007 Post /60th Scheme You receive pension under this scheme if you: Started teaching full, or part-time time after 1st January 2007 Look for the pink banner in this guide for more information about this scheme. Have not elected to opt-out of the Teachers Pension Scheme Have not had a continuous career break for 5 years or more Look for the blue banner in this guide for more information about this scheme. From 2012/13, changes to employer pension regulations changed with the introduction of auto-enrolment. This means that if you had previously opted out of the scheme, your employer would have re-enrolled you and you may have started to accumulate benefits from 2012/13, under the post /60th scheme. If you do not wish to remain in the TPS, you will need to opt-out again. See the Teachers Pensions website for details. If you joined after April 2015 You will be automatically enrolled in the Career Average Revalued Earnings Scheme, with your Normal Pension Age linked to your State Pension Age (SPA). If you need to check when your SPA is, check the Government website at: 5

6 Different rules, at different times The Teachers Pension Scheme (TPS) has changed over time. New rules will be in place from April 2015 based on Career Average Revalued Earnings (CARE), and members will be impacted in different ways. To know how the changes may affect you, we need to know what kind of member you are. What kind of member are you? From April 2015, the scheme in which you build up your pension benefits in changed. Depending on your service history, some teachers may end up with pension benefits built up in more than one scheme, whilst others may only have one. This will depend on: When you joined the TPS and which set of rules apply to you, details of which can be found on page 5 in this guide How close you were to your Normal Pension Age (NPA) on 1st April Protected Member If you were within 10 years of your NPA as at 1st April 2012, and you do not have a break in employment of more than five years from that date until you take your pension benefits, you are a Protected Member. You simply continue to build pension benefits in your existing Final Salary scheme. Tapered Member If you were over 10 years, but within 13½ years from your NPA as at 1st April 2012, you are a Tapered Member and your benefits will have some protection. You will continue to benefit from your existing rules, moving to the CARE scheme at a point between April 2015 and February 2022, depending on your date of birth. Transitional Member If you were over 13½ years from your NPA as at 1st April 2012, you will start the CARE Scheme from April The pension benefits you have built until that date will stay under the previous Final Salary scheme conditions. Your pension benefits will be a combination of Final Salary pension calculation and CARE pension scheme calculations (see our CARE scheme guide). How and when you take them all depends on your retirement planning. We hope this guide will help you make informed decisions to enable you to have the kind of retirement you want. New Member If you started teaching after April 2015, you were automatically enrolled into the CARE pension scheme. The examples in this guide are aimed at Protected Members who are approaching retirement and reviewing their retirement options. 6

7 Your monthly pension contributions Your monthly contributions are based on your salary, so the more you re paid, the higher your contributions. Since April 2015, the contribution rates are: Annual rate of pensionable earnings Contributions rate Up to 25, % 26,000 to 34, % 35,000 to 41, % 41,500 to 54, % 55,000 to 74, % 75,000 and above 11.7% In addition, your employer also makes monthly contributions to your pension at a rate of 16.48% - as at September

8 Pre 2007 members You contribute towards the scheme each month in return for a pension based on your final average salary (see page 9) Full time teachers were automatically enrolled into the scheme. Part time teachers who started teaching before 1st January 2007, needed to elect to join this scheme, as membership was not automatic. However, from 2012, auto-enrolment took effect, so teachers who had not previously joined or who had opted out would have started to accumulate benefits from 2012, under the post 2007 scheme. Key points Normal Pension Age (NPA) 60 Accrual Rate 1/80th The benefits In addition to your contribution, your employer also makes a substantial contribution towards the cost of your pension benefits. When you retire, you will receive a guaranteed, regular, taxable income for the rest of your life. This income is index-linked to protect its value against the effects of inflation. At retirement, you will also receive a tax-free cash lump sum. If you become too ill to work, you may receive your pension early (see page 20). If you die before retirement, your beneficiaries will receive a lump sum worth three times your salary and may also receive a proportion of your pension. If you die after retirement, your beneficiaries may receive a proportion of your pension. Standard lump sum 3 x annual pension income at point of taking the benefits Option to take higher lump sum Early / phased retirement from age 55 Pre /80th Scheme 8

9 When can I access my pension benefits? Your NPA is 60, however, you can access your pension benefits from 55. For more information, see page 16. You might also be able to access your pension benefits before 55 if you are retiring through ill-health (see page 20). How much pension will I get? You will receive 1/80th of your Final Average Salary for each day and year that you have worked, providing you have at least 2 years service. The calculation is: Number of years reckonable service 80 x Final Average Salary Final Average Salary Your pension is based on your Final Average Salary which is the greater of either: or the salary you received in the last 12 months before retirement the average of the best consecutive three years salary earned in the last 10 years Salaries are revalued to allow for inflation, using the Consumer Prices Index (CPI). There are some restrictions in place where there have been significant increases in salary in the run up to retirement. The pension will be taxable, in the same way as earned income. Example A teacher retires at 60 on a final average salary of 33,000, with 30 years reckonable service. Reckonable service Your reckonable service is the total number of years and days service you have as a member of the scheme. See your current statement to see how much service you have built up to date. It could be the total time you have been teaching, but can also include additional years from: Transferred in service from another public sector, defined benefit scheme Added Years a previous option under TPS, where members could buy additional service If you ve worked part-time in your career, your reckonable service may appear less than the number of years you have worked as a teacher. For example, if you worked on a 0.5 contract (2 ½ days a week) for 10 years, your reckonable service would equate to 5 full years. Your service data can be accessed via the My Pension online section on the Teachers Pensions website. Pension 30/80 x 33,000 = 12,375 annual pension. (before tax) This is the starting figure for the annual pension. It will be paid monthly, and will increase each year in line with CPI. 9 Pre /80th Scheme

10 Pension Commencement Lump Sum Pension Commencement Lump Sum benefit (PCLS) is the standard pension lump sum that you receive when you access your pension. Under the Pre 2007 Scheme rules, this is automatic and can t be transferred into monthly pension. It is often referred to as the Tax-Free Lump Sum and is worth three times your annual pension income. Using the previous example: Pension: 30/80 x 33,000 = 12,375 annual pension. (before tax) Standard lump sum: 12,375 x 3 = 37,125 (tax free) The tax-free statement will depend on whether your total pension entitlement is under the Lifetime Allowance limits. For 2015/16 this is 1.25 million. Taking a higher lump sum You can take up to 25% of the capital value of your retirement benefits as a lump sum. If you do, your pension will be permanently reduced. Does that sound good? Should you take the larger lump sum? Taking a tax-free lump sum will be better than paying income tax on the pension income won t it? The answers to these questions depend on your personal circumstances; there is no right or wrong answer. It s very much a personal choice and will depend on how much immediate, ready cash you think you ll need, compared to regular guaranteed income. You do not have to take the maximum 25% of the capital value of your retirement benefits you can choose a lump sum between this figure and the standard lump sum if you prefer. This involves a more complex calculation see the example on the next page. Also you should note that tax rules could change in the future. Taking a higher lump sum has an impact on the annual pension, because the pension is reduced at the rate of 1:12. So for every 12,000 extra lump sum, you give up 1,000 of pension each year. Although you can t exchange your lump sum for a higher monthly pension, you can choose to take a higher lump sum with a reduced monthly pension. Pre /80th Scheme 10

11 Some of the things teachers have told us that they would do with the larger lump sum are: Pay off the mortgage Pay off credit cards Holiday of a lifetime Art and antiques New car New house Home improvements Start a new business Daughter s wedding Gifts to grandchildren University fees Investing for growth This is not an exhaustive list and will depend on individual circumstances. The calculation below is used to show how much more tax-free lump sum a teacher could take, based on our previous example: Annual Pension x ,375 x 33 equates to = 29, This would give a total maximum lump sum of 66,295, but the initial annual pension would reduce to 9,944. Key points to remember: By taking the higher lump sum, you give up an element of guaranteed income for life That income would grow in line with CPI What will happen to the lump sum should you die? You could be giving up dependants or partner s benefits Once the decision is made and a higher lump sum is taken, you cannot change your mind and ask to pay it back in exchange for an income in the future 11 Pre /80th Scheme

12 Post 2007 members You contribute towards the scheme each month in return for a pension based on your final average salary (see page 13) Full time teachers were automatically enrolled into the scheme, unless they elected to opt out. You will need a minimum of 2 years membership of the Teachers Pension Scheme to qualify for pension benefits. Key points Normal Pension Age (NPA) 65 Accrual Rate 1/60th Option to take lump sum benefit (up to 25%) Early / phased retirement from age 55 The benefits In addition to your contribution, your employer also makes a substantial contribution towards the cost of your pension benefits. When you retire, you will receive a guaranteed, regular, taxable income for the rest of your life. This income is index-linked to protect its value against the effects of inflation. If you become too ill to work, you may receive your pension early. See page (20) If you die before retirement, your beneficiaries will receive a lump sum worth 3 x your salary and may also receive a proportion of your pension. If you die after retirement, your beneficiaries may receive a proportion of your pension. You may also be able to transfer in pension credit from another scheme Post /60th Scheme 12

13 How much pension will I get? You will receive 1/60th of your Final Average Salary for each day and year that you have worked, providing you have at least 2 years service Years of reckonable service 60 Reckonable service: Your reckonable service is the total number of years and days service you have made as a teacher, whether full or part time. See your current statement to see how much service you have built up to date. It is the total time you have been teaching, but can also include additional years from: Transferred in service from another public sector, defined benefit scheme If you ve worked part-time in your career, your reckonable service may appear less than the number of years you have worked as a teacher. For example, if you worked on a 0.5 contract (2 ½ days a week) for 10 years, your reckonable service would equate to 5 full years. Your service data can be accessed via the My Pension online section on the Teachers Pensions website. x Final Average Salary Final Average Salary Your pension is based on your Final Average Salary which is the greater of either: or the salary you received in the last 12 months before retirement the average of the best consecutive three years salary earned in the last 10 years Salaries are revalued by inflation, using the Consumer Prices Index (CPI). There are some restrictions in place where there have been significant increases in salary in the run up to retirement. The pension will be taxable, in the same way as earned income. Example A teacher started on 1st September 2007 and is will retire aged 65 on 31st August 2022 with a final average salary of 33,000. They will have 15 years reckonable service. Pension 15/60 x 33,000 = 8,250 (before tax) This is the starting figure for the annual pension. It will be paid monthly, and will increase each year in line with CPI. Members in the post 2007 scheme do not get an automatic lump sum, but can choose to take a lump sum by giving up some of the annual pension. 13 Post /60th Scheme

14 Taking a lump sum You can choose to take a Pension Commencement Lump Sum benefit (PCLS) when you access your pension. This is often referred to as tax free cash, but that will depend on whether your total pension entitlement is under the Lifetime Allowance limits. For 2015/16 this is 1.25 million. You will give up 1 of your pension for every 12 of lump sum you choose to take. The maximum lump sum that you can take is 25% of the capital value of your pension - you can take a smaller lump sum if you wish. Bear in mind that decisions you make about taking a lump sum are irrevocable and your pension will be permanently reduced. You need to make this decision when applying for your pension benefits. The calculation for the maximum lump sum is: Calculating the maximum lump sum, using the example on the previous page: 8,250 x ,500 = = 35,357 7 (lump sum benefit) To work out the amount converted to a lump sum and the residual (reduced) pension: 35,357 = 2, ,250 (the annual pension), minus 2,946 (the amount converted to lump sum) 5,304 (reduced pension) Annual Pension x 30 7 Post /60th Scheme 14

15 Early retirement Whichever set of Scheme rules you are under, you can currently retire and access your TPS benefits from age 55. Your pension will be actuarially adjusted and the earlier you retire, the lower your pension will be. Essentially, your pension income is being stretched over time. As you are retiring earlier - and statistically you may live longer - the pension you are entitled to is likely to be paid for a longer period of time. The calculators on the Teacher s Pension Scheme website will give you an illustration of the long-term financial effects of early retirement. There is a different factor for each year and month you retire early and these factors are available from Teachers Pension Scheme. These factors were changed in 2015 If you have increased your pension using Additional Pension Benefits (see page 18) a different rate will apply. If you have benefits across different scheme rules, you can still opt to take early retirement from age 55. If you leave service completely, or phase your retirement (see page 16) you can choose which element you access. This may well reduce the total actuarial adjustment on your pension benefits. The pension you have accumulated to date is multiplied by a factor. Different factors are used depending on whether your benefits are from the pre-2007, post 2007 or 2015 Career Average Revalued Earnings schemes. Pre /80th Scheme early retirement example Rather than retire at 60 on a final average salary of 33,000, with 30 years reckonable service, our pre-2007 member decides to leave 2 years earlier, at age 58. This means they would have 28 years reckonable service. Pension = 28/80 x 33,000 = 11,550 annual pension (before tax) When retiring at age 58 exactly, the actuarial adjustment factor is ,550 x = 10,534 (actuarially adjusted annual pension) This will still increase in line with CPI each year. There will also be an automatic Pension Commencement Lump Sum benefit of 31,602 15

16 What happens if I wish to take part of my pension but carry on working? This is known as phased retirement With your employer s permission, you can phase your retirement from age 55 - drawing up to 75% of your pension whilst continuing to work and contributing to the scheme. You must reduce your salary by at least 20% for at least 12 months. The part of your pension that you draw will be actuarially adjusted, as you are taking it early. This example shows what could happen: using the same details from earlier, our teacher decides to phase rather than take full early retirement at 58 with 28 years reckonable service. Their employer agrees that they can work part-time on a 0.5 basis, therefore reducing their annual salary to 16,500. Having completed a personal budget plan, they require a total annual income of 22,000 Level of gross income required each year: 22,000 (target income) 16,500 (annual salary) 5,500 (shortfall) Pension 28/80 x 33,000 = 11,550 For age 58, the actuarial adjustment factor is ,550 x = 10,534 (actuarially adjusted annual pension) Therefore, 5,500 = 52.2% of attained pension benefits A 16,500 lump sum would also be received Our teacher can also continue to contribute to the pension and if they work beyond their normal pension age, the remaining element of benefits can be accessed without the actuarial adjustment. 16

17 When and how do I apply for my pension? You must apply for your pension at least four months before the date you want to retire. You can get a form from your employer, download one from the Teachers Pension Scheme website at teacherspensions.co.uk, or complete the application online. Make sure you select the correct form for the retirement option you want. If you ve been employed within the last 12 months, you employer must complete and sign too. What happens if I want to go back to teaching? Many teachers think about returning to teaching after they retire and start to draw their pension. If you return to a pensionable teaching post, you will need to complete a certificate of re-employment and you will join the latest Career Average Revalued Earnings (CARE) scheme. You can choose to opt out if you wish. If you retire at or after your NPA, your new salary plus your pension mustn t exceed your previous salary. This is known as your salary of reference and is found on your pension statement, sent to you when you retire. It is based on the highest salary you earned either in the last 12 months of work or the average of the best three consecutive years in the last ten years before you draw your pension. If you earn more than your salary of reference in any tax year, your pension will stop for the rest of that tax year. This does not apply if you phase, or have taken early retirement with actuarially reduced pension benefits. 17

18 How can I top up my benefits? If you feel you want a larger lump sum (capital) or a greater amount of income in retirement, you have a number of options. The options available are: Additional Pension Benefits Additional Voluntary Contributions from the Prudential Other pension arrangements, such as a Stakeholder, or Personal Pension For anyone with benefits under the CARE arrangement, you could also look at: Accelerated accrual (opting to have 1/45th, 1/50th or 1/55th rather than 1/57th); and/or Actuarial Adjustment buyout. You can also consider: Other Savings or investment plans, such as a New Individual Savings Account (NISA) The advantage of pensions options are that contributions are deducted from salary with tax relief on contributions, but income or capital (in excess of the 25% tax free amount) may be taxed, depending on your personal tax circumstances. Additional Pension Benefits (APB) The option to buy Past Added Years is no longer available - although if you elected to do this before the end of 2006, this will still be honoured. Instead, you now buy Additional Pension Benefits: a fixed additional amount of pension income of between 250 and 6,300 each year. This additional pension is calculated separately from your main pension benefits. The cost depends on your age and your required amount of additional pension, but it will be indexlinked both while you re working and after you retire. You can pay for Additional Pension by either lump sum or regular deduction from your salary. These deductions are made before your salary is taxed so you effectively receive tax relief on your contribution at the highest rate at which you pay income tax. The maximum payment period is 20 years and must be completed before your NPA. If you have a NPA of 60 but are in pensionable employment beyond that, then you can buy Additional Pension based on an NPA of 65. Savings and Investment plans may have greater flexibility around when you can access your money, and could also have tax advantages, but that will depend on your circumstances. 18

19 Teachers Additional Voluntary Contributions (TAVC) Tax efficient contributions, made directly from your salary, can build up an additional pension pot, separately to your teachers pension that you can access from 55. You can use some, or all of your pot to guarantee taxable income for the rest of your life in addition to your teachers pension. When drawing your TAVC benefits, you can use the whole fund to buy a regular income for life (known as an annuity) from Prudential. You could use your Open Market Option and select an annuity from another provider. You may be able to get a higher annual income especially if you have a medical condition, such as high blood pressure or if you smoke. Alternatively, you can take up to 25% as a tax-free lump sum and, from April 2015, have a choice of what to do with the remaining funds. You can opt to take the remaining funds as a lump sum, but it will be taxed as income. 19

20 What happens if I m too ill to work? If you re ill, or have long term health issues, you may have to stop working, even if you haven t reached retirement age. Your employer and their occupational health advisor should look at ways of helping you stay in, or return to, work. This might include reducing your hours or changing your role, perhaps through redeployment, part-time working, or other workplace adjustments. Depending on how long you ve been in service, you will continue to receive your salary for a period - but if all measures fail, then ill health retirement may be applicable. There are two levels of ill health benefits that might be granted. It will depend on which of the following two conditions are satisfied. You are permanently unable to teach, but are able to do other work. In this circumstance, you would receive the pension benefits you have accrued to date. No actuarial adjustment is made with ill-health retirement and you can access benefits before age 55. You are permanently unable to teach and unable to do any other work. In this circumstance you would receive the pension benefits you have accrued to date, plus an enhancement. This enhancement is based on half of the service you could have completed before reaching your Normal Pension Age. What if I die? Regardless of how long you have been a member of the scheme, a lump sum worth three times your average salary will be paid to your spouse, civil partner or surviving nominated partner, or a nominated beneficiary. This will happen if: You die while you are in pensionable employment. You die within 12 months of leaving pensionable employment, due to ill-health and you don t reach NPA. You die while serving in a reserve force. You die during non-pensionable family leave. Nomination forms can be accessed via the My Pension Online section of the TPS website. If you die after you retire, a short term pension may be paid to your beneficiaries based on the pension you were receiving when you died. This is usually paid for three months after you die. Long-term pensions for adult beneficiaries These are paid at a rate of 1/160 of the final average salary for each year of your family benefits service. If all your service counts for family benefits, the pension will be half the pension you have earned up to the date of your death. If only part of your service is covered for family benefits, the pension will be less. Full details of Survivor and Dependents pensions can be found at teacherspensions.co.uk 20

21 What other financial plans should I be making? You should make sure you have completed a budget to check your expected expenditure against your retirement income. Remember, you may be entitled to a State Pension that may increase your income in the future. Some of the other areas you may wish to consider as you enter retirement are: Savings for yourself - choose from a variety of savings and investment plans to pay out a lump sum so you can afford to retire comfortably, or have potential lump sums in the future. Buildings and contents insurance changing your cover to take advantage of discounts available to retired teachers Life assurance bridging the gap between retirement and when you can draw income from any invested lump sums (to protect your spouse or partner from a drop in income in the event of your death) Where do I go for more help? If you are in any doubt or need further information on anything covered in this guide; You can contact Teachers Pensions for further information or additional illustrations of your benefits: Telephone: Website: teacherspensions.co.uk Address: Teachers Pensions, 11B Lingfield Point, Darlington, DL1 1AX Additional free and impartial advice may be obtained from the Money Advice Service. Alternatively you could contact a Financial Adviser. Please note, you may be charged for their services. Saving for your children or grandchildren tax efficient savings such as Junior ISAs to help give younger family members a start in life Mortgage planning - revising mortgage arrangements that continue into retirement to save money. Your home is at risk if you do not keep up repayments on your mortgage 21

22 Why should I choose Teachers Assurance? Teachers Assurance has been working alongside education professionals and their families for over 137 years. Today, we continue to support teachers with regard to their pension and other benefits they may receive. Our team of specialist Business Development Officers deliver seminars and educational sessions on pensions and other areas of financial planning across the country. We also provide a range of resources and information via our website. To find out more about Teachers Assurance, or to book a place on an upcoming seminar, visit our website today teachersassurance.co.uk. 22

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24 If you d like additional information, visit teachersassurance.co.uk/services/retirement-hub Tringham House, Deansleigh Road, Bournemouth BH7 7DT Tel: teachersassurance.co.uk Teachers Assurance is a trading name of Teachers Provident Society Limited (TPS), an incorporated friendly society No. 372F. Authorised by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority, entered on the Financial Services register no Registered in England and Wales. Registered Office: Tringham House, Deansleigh Road, Bournemouth, BH7 7DT