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Can you Help me decide which is best please?

Discussion in 'Retirement' started by HannahD16, Oct 28, 2019.

  1. HannahD16

    HannahD16 New commenter

    Hello everyone. I wonder if anyone can shed light on this for me. I know responses will be with the caveat to check with TPS and I will but would like the value of your insights first.
    Am aged 52, transition member and aim to last until 60. I am a 40% taxpayer and want to boost my pension.
    My question is this: if I put £500 pm into additional pension what would likely effect be on my pension at the end of those 8 years?
    Or is faster accrual better?
    Any thoughts appreciated
  2. Sundaytrekker

    Sundaytrekker Star commenter

    A quick play with the calculator

    suggests around £2000 a year on your pension.

    -I paid slightly less over nine years and it was worthwhile. Bear in mind:

    -you save on the money going in through not paying 40% tax on that contribution

    -you can only contribute over complete tax years between now and your retirement date so you might not get eight years in

    -the amount you buy goes up by inflation over those years so if it’s £2000 now it will be more when you collect it

    -they will revalue your contributions at some point over those years and they can go up a bit too

    I don’t really know whether faster accrual would be better. I think you chose to do it year by year so it might have more flexibility.
    Lara mfl 05 likes this.
  3. HannahD16

    HannahD16 New commenter

    Thank you Sundaytrekker. Food for thought. I want a comfortable retirement free from money worries. Saw too many of the older generation especially women, struggle financially. Don’t want to go there!
  4. diddydave

    diddydave Established commenter

    I did some calculations for another thread - here they are:

    Quite a few variables to look at in order to work out whether it is a good scheme or not, so I'm afraid you'll need to find someone you trust or get your head around the figures yourself as everyone's situation is different.

    Faster accrual is limited so you may not be able to put in £500 a month.
    Additional Pension has to be bought in £250 blocks.

    Try the calculators here: https://www.teacherspensions.co.uk/members/calculators/flexibilities.aspx

    We are similar ages so for the additional pension, for my NPA of 67 if I want £500 extra it will cost me £6,360. If your wage is more than £59,500 then that is fully in the 40% bracket then you can claim back the tax paid on this so it actually costs you £3816 (the tax authorities don't get the tax of £2,544)

    But you have to wait 15 years to get it so would be losing whatever investment return you can get on £3816 (compounded over those 15 years)...but with 'safe' investments it's unlikely to be getting better than the inflation figure so the actual buying power of your £3816 is very likely to be going down.

    However, the £500 of extra pension is being increased each year by inflation so its buying power remains the same. (the additional pension doesn't benefit from the 1.6% additional boost that career average accrued 'faster accrual' benefits get)

    The 'faster accrual' flexibility has a maximum of 1/45th of my earnings so there is a limit on how much this can be used. For a salary of £59,500 this would cost about £4700 (£2820 from you and £1880 from the tax) for the year and add about £278 to your pension. However, this would benefit from the extra 1.6% boost above inflation each year that you continue to work.

    So for comparison I'd look at how much £1 of extra pension costs (ignoring the 1.6% boost)
    £1 Additional Pension costs £7.63
    £1 Faster Accrual (1/45th) costs £10.14

    Faster accrual appears to be about 33% more expensive but benefits from the 1.6% boost whilst you are working. Taking into account the 1.6% boost (I think, because I've not checked the theory on the maths fully) it means you would have to work about 16 years before the 'value' of the Faster Accrual would overtake that of the Additional Pension.

    So for the Additional Pension, £500 costs you £3816, so if you live for 8 years after taking the additional pension you are 'in profit' thereafter...unless you can find an investment that beats inflation.
  5. HannahD16

    HannahD16 New commenter

    Wow, that’s a really detailed analysis diddydave. Thank you. I will make a decision and contact TPS by Christmas to start one or other. I know other posters here have suggested SIPPS but I’m a lazy person at heart and have not always made the best investment decisions in the past. Thank you both for your help
  6. mustntgrumble

    mustntgrumble New commenter

    Small addition. I did similar calculations to DD about purchasing a lump sum near the end of my career. i.e different sets of calculations based on the projected effect of inflation, index linking return on the initial investment as 40% taxpayer. BUT the same pension scheme. Interestingly I came up with 8 to 10 years before I got money back and all payments after that were index-linked profit. I think those wiser than us have carefully balanced the pension scheme and it seems that IF you are going to live more than 8 years after you retire then TPS is best current investment strategy around at the moment.

    It will be a little annoying however to die before I hit the 8 years of retirement.
  7. diddydave

    diddydave Established commenter

    I can see you turning in your grave!
  8. letap

    letap Occasional commenter

    Whilst playing about with the TPS website calculator I noticed that it made a calculation for the final salary pension scheme with the NPA at 60. I have had a quick look at the additional pension factsheets and I couldn't see a statement which suggested that transition members could not have additional pension on the final salary aspect of their pension.
    In this case if it is possible to buy additional pension for the final salary aspect of the pension then would that not be the better option?
  9. HannahD16

    HannahD16 New commenter

    I suppose a lot depends on how this tribunal rules etc etc. I do think you are correct letap and I wondered how TPS might decide if one were to apply for one of the flexibilities next tax year in the next few weeks before all ironed out. Maybe for one year only till all it’s clear what is happening. Act fast?
  10. diddydave

    diddydave Established commenter

    Interesting, I didn't consider that...for an NPA of 60 to buy £500 additional pension costs £8880 (£5328 from you and £3552 from the tax)...I also forgot that the pension would be taxed @20%, so that £500 extra would be worth £400 which means it would take 13.3 years to recoup...by the time you are 73.3.

    NPA67 £3816 / £400 = 9.5 years to recoup...so by the time you are 76.5
  11. diddydave

    diddydave Established commenter

    Regarding the changes that will come about there is a promise that no-one will be in a worse position than they have already achieved so that certainly is an option. Do bear in mind that your tax benefit is limited to how much you pay and in what bracket. Also your normal pension deductions are deducted from your salary before tax is calculated so the amount you have in the 40% bracket may be less than you think.

    For example the 40% tax starts at £50000. However at this salary you are paying 10.2% into the pension so you could have a salary of £55,679 and you would not be paying anything in the 40% tax bracket because the extra £5k is used to pay for your standard pension.

    If your payment for additional pension is in the 20% tax bracket then you are paying a greater proportion and the tax authorities less for it. For example on your NPA60 the extra £500 additional pension costs £8880 and at 20% this costs you £7104 and the tax authorities £1776. This means it goes from 13.3 years to recoup to 17.8 years. I think this makes it clear that you do need to get someone who can do the calculations with you who can go through your complete personal circumstances.

    I made a little spreadsheet to check how much tax you pay in each bracket - feel free to make a copy to check your own numbers: https://docs.google.com/spreadsheets/d/170VKiVWArFof16NVts68yqxbJJlquXGr3LAcOhR_7sY/edit?usp=sharing
    Last edited: Oct 29, 2019
  12. Piranha

    Piranha Star commenter

    I am not saying this applies to many people in education, but it might to a highly paid Head or somebody with large pensions carried forward from previous jobs. If your annual pension is likely to be over about £50,000, you could fall foul of the lifetime allowance rules. In which case, buying more pension may not be a good idea. If this might apply, then getting expert help is worth it, as the stakes are pretty high.
  13. HannahD16

    HannahD16 New commenter

    If only Piranha! I just about crawl inside the 40% bracket and want to exploit any tax savings in sorting out my old age. Have contacted TPS today to ask them for an either/or estimate for faster accrual and additional pension. I’ll take a bit more advice when that comes through and happy to let you know how I get on. Thanks for the response - don’t want to give Boris any more beer coupons than I have to
    Piranha likes this.

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