Teacher’s Pensions - advice out of school
Teacher’s pensions are administered under the Teacher’s Pension Scheme (TPS) and are a final salary pension scheme. Pension income is calculated on the basis of salary at retirement.
With the teacher’s pension scheme, conditions have been modified at the beginning of 2007, giving slightly different rules for those who have joined the teacher pension scheme since then. The bulk of members are subject to the older rules governing the TPS however, and Principle First can offer pension advice on both the former and the current rules on teacher’s pensions.
Teacher’s pensions – Rules for those joining the teacher pension scheme until 2007
Until the beginning of 2007, teacher’s pension contributions to the TPS were 6% of salary, and the voluntary retirement age for those saving for teacher’s pensions was set at 60, while the normal teachers pension age was 65.
Teachers pensions were calculated at 1/80th of final salary for every year of service, plus a cash lump sum based on 3/80ths of final salary for each year of service.
For a teacher on a final salary of £40,000 with 40 years of service, therefore, pension income would be 40/80 or half of final salary, which equals £20,000 per year in taxable pension income. In addition, the tax-free lump sum upon retirement would be 120/80ths of final salary, i.e. 1.5 times salary, equalling £60,000.
At the beginning of 2007, the rules governing teacher’s pensions changed, but this affects only those who have joined the TPS since that date. For all other members, their retirement planning and pension savings are unaffected and remain subject to the older rules. Since 2007, pension income is now based on 1/60th of final salary for each year of service. Further changes to the teacher’s pensions took effect from 1st April 2009, making it possible to take 25% of the teacher’s pensions pot as a tax-free lump sum.
Under the new rules, our teacher earning £40,000 with 40 years of service will receive 40/60ths or 2/3rds of final salary as their pension income, equal to £26,666 per year. In addition, since the pensions pot to deliver this annual income will be around 20 times that amount i.e. in the region of £533,000, a quarter of that, or £133,000 would be the available tax-free lump sum.
