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Another early retirement with a shortened career

Discussion in 'Retirement' started by up116647, Sep 21, 2020.

  1. up116647

    up116647 New commenter

    Evening all

    I qualified as a teacher at the ripe old age of 41 and thanks to a previous career in the military, I already have a pension paying out.

    I would like to retire at 55 so will only have 14 years of pension contributions. I’ve not been on the TPS long enough to get an idea of potential payments at 55 so have the following questions:

    1. Is it possible to work out?
    2. If so, would AVCs or another option be worth doing (I’m just into the higher tax bracket).

    I could overpay in the mortgage but interest rate is currently at 1.45% for 5 years so looking at alternatives.

    Thanks in advance
     
  2. diddydave

    diddydave Lead commenter

    1) Yes. Though if you joined before 2012, which sounds likely, it's a little more complex due to the changes that have got to happen and be backdated because of the age discrimination case.

    But in essence you will get the choice of:
    a) Staying in the mix of scheme - this is shown on your benefit statement (teacherspensions.co.uk).

    b) Having it treated as being all in the final salary scheme, I presume that part of your pension is in this anyway up to 2015 and that if you were in the scheme before 2007 (again presuming that is the case with your 14 years) you can work it out fairly easily. On your benefit statement you will have the 'salary' used in the calculation (the best of Method A and Method B). You need to know how much service you have in total, so from the date you joined to today. Convert those years and days into a single decimal number of years (years + days/365), divide it by 80 and multiply it by that salary figure.

    2) At the moment the tax benefits of putting any money that would be taxed at 40% into a pension scheme, AVC, Additional Pension, Private pension etc are too good to be ignored. In essence this allows you to move money earned this year where it would be taxed at 40% to future years where it would be taxed at much less (so long as the current laws and tax levels remain unchanged). It also gets the benefit of 25% of the sum being tax-free.

    E.g. Looking at £1000 that would be taxed at 40%.

    You don't put it in a pension so you get £600 in your pocket.

    You put it in a pension and then, once you reach 55 and your income drops you take it out.
    If your income is below the lowest threshold (£12,500 currently) then you get ALL £1000 of it.

    If your income is such that it would be taxed at 20% then you get 25% tax-free leaving only £750 to be taxed at 20%. Tax taken is £150 leaving you with £850 in your pocket.

    By comparison £600 paid off your mortgage now would give you a total of £8.70 over those 5 years.
     
    up116647 likes this.
  3. frodo_magic

    frodo_magic Occasional commenter

    Also, check your NI contributions ensure you will have enough to maximise your state pension:

    https://www.gov.uk/check-national-insurance-record

    It's a week long process to create an account but fairly painless.

    Agree with all the above. My first priority would be to pay off any debts as quickly as you can, cards, loans, car loan and mortgage. Then stay loan-free. After that, pile earnings into a mix of extra pension, SIPP, AVC etc, keeping a 6 month cash buffer.
     
    up116647 and wayside34 like this.
  4. up116647

    up116647 New commenter

    Thanks very much for you prompt and detailed responses - I’m in the latest scheme, so career average, not final salary.


    NI is good, need 7 more years - I’m 42 at the moment so only really just entered teaching
     
  5. diddydave

    diddydave Lead commenter

    Sorry, I misread your 14 years as already being in the bag, not 14 to go.

    To forecast the amount you can get a rough idea by doing several calculation based on today's values. The pension is index linked so don't worry about inflation just base it on salaries around now.

    Each year your pension is 1/57th of your salary but if you are teaching a year later it is 'boosted' by 1.6% above inflation. This can have a very good cumulative effect over the years.

    For instance, take your salary this year divide it by 57. That's the basic amount of pension. Then, if you were to work for another 14 years it gets 13 years of 1.6% boost. The maths then is to multiply your basic amount by 1.016 to the power of 13. (1.016^13 = 1.229)

    As an example, a salary this year of £28,500 would add £500 to the pension pot. (28,500 / 57).
    In 14 years that £500 amount has been turned into £614.
    Remember, these are in today's values - it will also be increased by inflation.
     
    Prim and up116647 like this.
  6. Prim

    Prim Occasional commenter

    You've done well if you have just entered teaching and are in the 40% bracket. What's your secret?
     
    PeterQuint and up116647 like this.
  7. Braindead101

    Braindead101 New commenter

    Possibly due to the army pension already paying out?
     
    PeterQuint and up116647 like this.
  8. up116647

    up116647 New commenter

    Yep, RAF pension with a bit of weekend work due to a certain virus doing the rounds ;)
     
    PeterQuint and Prim like this.
  9. up116647

    up116647 New commenter

    Thanks diddydave, really appreciate the information. If I was to add more to the pension (I think I can afford this year's payrise (£150ish per month), what would be the most tax effective way?

    Cheers
     
  10. diddydave

    diddydave Lead commenter

    The easy answer to that is that, under the current system, ANY pension gains the same tax benefits as any other pension scheme.

    There is a slight difference in how you get the tax benefit though. For those paid directly through your salary, i.e. Additional Pension, Faster Accrual, Buy out and the AVCs, the tax relief is done automatically - even at the higher tax rates. There's nothing else you need to do.

    For the purchase of Additional Pension using a lump sum, i.e. not through your monthly salary, you need to contact HMRC to get all of the tax relief and this can be slightly more tricky because they don't always realise that you need to have the lower tax rate relief as well because most schemes do this part automatically.

    For private pension schemes you need to contact HMRC and sort out how to get the tax relief for the higher band - the lower band is done automatically by the pension scheme, they add back the 20% tax into the scheme.

    One other consideration is that any of the TP options will, if taken early along with the rest of the TP, be actuarially reduced.

    The HARD part is one that cannot be answered. Which scheme is best? To be fair you didn't ask this question but it's quite often what people want to know. It depends on factors that are just now known, inflation, market growth etc...so I have no advice on that...what I did do was a comparison of Faster Accrual against Additional Pension: https://docs.google.com/presentation/d/1iJDZgDwy6s2PoOaQ-0zNHS7jSvCuKHt3nMA8-t_aXOs/edit?usp=sharing

    Personally I went down the AVC route as it gives greater flexibility than the Teacher Pension extras because it can be used independently of the TP.
     
    up116647 likes this.
  11. frodo_magic

    frodo_magic Occasional commenter

    You're posting at 4.30am? I'm impressed.
     
    up116647 likes this.
  12. diddydave

    diddydave Lead commenter

    LOL...almost like being back at school when I got up only a bit later than that to walk the dogs every day...today was a golf competition...which I've just got back from and perhaps staying in bed WOULD have been the better choice!
     
    up116647 likes this.
  13. up116647

    up116647 New commenter

    Thanks- hopefully you were not the one that managed to slice the ball to the left 150’ into my back garden! I’ve no idea how they managed it - even the wind was coming from that direction
     
    diddydave likes this.
  14. diddydave

    diddydave Lead commenter

    I hope not, though we do have a couple of holes with houses down the left I went so far right I was on another fairway.
    I did lose one ball to the right in a wood...if it has a purple stripe on it that's mine.
     

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