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contracted out pensions?

Discussion in 'Welcome lounge and forum help' started by zondacat, Jan 1, 2019.

  1. zondacat

    zondacat New commenter

    I started teaching in 1991.
    I have been told that I was "contracted out" of part of the state pension and that this is quite usual. Is this a good thing? As far as I can make out, this means that my employer and I paid reduced NI in return for a higher yield on my employer pension. I am now 50 and want to get out ASAP - what do I need to do?
  2. Lara mfl 05

    Lara mfl 05 Star commenter

    Anyone in Local Government, NHS I think and teaching automatically had reduced contributions because they were negotiated as part of the 'pension schemes' and there was no choice. There's nothing you can do about redressing this tough unfortunately. Though I do wonder if the more recent (post 2007/9) pension scheme is still the same?
  3. diddydave

    diddydave Lead commenter

    Very similar situation to me, started in 1990 and left last year...but everyone is different so would strongly advise you get professional advice...Wesleyan did me a free session and they have specialists for the teacher scheme.
    The state pension won't affect you until you are 67 anyway and I discounted it entirely in my calculations.
    I got a set of figures from the DFE about my contributions and one thing to get straight away is what are your best 3 years from the last 10, as they are index linked it is likely to be the ones 10, 9 and 8 years ago - for each year you work your pension will be one year more BUT the salary is likely to be less, in my case it was only just about worth staying in the teacher's pension scheme - so you MUST get professional advice from someone who really understands the numbers and your personal circumstances.
    For me I have another income so I am living off that in the 5 years that I go from 50 to 55 and then I have put away enough in a private pension that I can draw an income from (thanks to the recent changes in accessing pensions early) for my years 55 - 60 (so I don't have to take the reduced teacher pension early) - I worked out that by doing this I come out ahead if I live at least until 73 and I also wanted the largest possible teacher pension as the index-linking probably (crystal ball looking in the future kind of probability) gives the best protection against inflation.
    Sorting out a private pension was key to my plans and no savings account comes close to the returns that the tax-saving offers, even at the basic 20% (if you are in the 40% bracket even more so). Suppose you are earning 30,000...at today's rates the basic allowance is £11,850 so you pay tax of 20% on £18,150...put all of this into a private pension and there is no tax and then you can, when you are 55 and have no other income, draw most of it out tax-free (assuming current rules stay the same) as you get 25% of the amount tax-free and have your new personal allowance. There are limits on how much you can put into a private pension but you can use previous year's unused allowances...BUT again you will need professional guidance and it makes sense to act quickly before the end of this tax year.
    Lara mfl 05 likes this.
  4. diddydave

    diddydave Lead commenter

    Lara mfl 05 likes this.
  5. Lara mfl 05

    Lara mfl 05 Star commenter

    You do need to sign up with gateway first and that can take up to 10 days to do and then reset your password to something you'll remember.
    EDIT Having checked this one seems to be different to what I had to do.
  6. diddydave

    diddydave Lead commenter

    For the benefit of the OP then as their profile is similar to mine - my state pension is projected to be about £140 a week but if I work for another 6 years it *jumps* to £164 (~£100 a month - I didn't consider this significant enough to affect my decision)
  7. Lucy2711

    Lucy2711 Occasional commenter

    zondacat, if you repost in retirement forum (and look back at previous threads) you may find further useful information.
    Lara mfl 05 likes this.
  8. zondacat

    zondacat New commenter

    THanks Lucy but I don't know how to get to the retirement forum! Can you help?
  9. Lara mfl 05

    Lara mfl 05 Star commenter

    Pension forum is accessible by going to the 'Community' page and scrolling down to 'Role' and 'Retirement' is next to last in the list.

    Or this link should take you straight to the Retirement Forum and then if you Bookmark it for future reference and you can also add it to your list of Watched Forums.
  10. zondacat

    zondacat New commenter

    Lara mfl 05 likes this.
  11. jubilee

    jubilee Star commenter

    There are some very confused and misleading statements about Contracted-Out, State and TPS pensions on here!
    Prior to April 2016 the State Pension was potentially two pensions, the Basic pension and SERPS (State Earnings Related Second Pension).
    If a worker was not in an employee pension scheme, they were automatically co-opted into SERPS and paid the higher Contracted-In National Insurance contributions (as did their employers). The more they earned, the more higher rate NI they paid and hence the more State second pension they would eventually get.

    If a worker, like a teacher, was in an occupational pension scheme like the TPS, they had a second pension to add to their Basic State pension. Hence they were Contracted-Out of SERPS and paid a lower National Insurance (about 1.7% lower) Contribution (as did their employer). Their TPS payments were also deducted from gross pay before income tax was levied, so being in the TPS had huge tax advantages too. Those who foolishly decided to Opt-Out of the TPS found that for every £100 they had been paying into the TPS, they only saw about £55 extra in pay as they now became part of SERPS, paid higher NI on all their eligible income, and paid more income tax.

    The Government then decided to streamline the State pension. Everyone would pay the Higher NI rate from 6th April 2016 and, as time went on, everyone would be claiming the single, higher State pension. The claim age was increased though!
    Some employees did some work where they paid into an Occupational pension and other work where they paid into SERPS. As a Supply teacher, I did several years of private agency teaching, and added to other work I'd done before teaching, that has given me some SERPS years. I also did LA paid teaching on supply and built up just over 7 years in the TPS.
    I stopped teaching at age 56 and decided to trigger my TPS pension, taking an actuarial reduction on the lump sum and the monthly pension in order to claim it before age 60. I then had to wait until age 65 (last year) to claim my State pension.
    I got a forecast of my State pension and found out that I could boost it by paying Voluntary Class 3 contributions for 2016-2017 & 2017-2018 (when higher NI applies to everyone). There was no point in buying any deficient NI years prior to 2016 as I already had the maximum needed for the old State pension. Buying post 2016 NI years boosted my entitlement to the new State pension. I now get £164 per week and the extra £10 per week will pay off my Voluntary NI investment in 3 years. I'll then be better off for life.

    Some of you may leave teaching before your designated TPS pension age and might take other work to avoid triggering your TPS too early. You may trigger your TPS early (from age 55) and top it up with other work. You might instead be eligible for JSA/ Universal credit and that will confer free NI credits to keep increasing your State Pension entitlement. You might end up being a carer, claim the official Carer's Allowance and also get a free NI credits for each week claimed.
    My sister left the Civil Service at age 58 and took a p/t job with M&S, which she loves. It covers her basic expenses and keeps her NI years increasing. She's made good use of the staff discount too. At age 60 she triggered her Civil Service pension and has continued to work p/t. She will thus get the maximum State Pension possible when she reaches age 67.
    makras and Sundaytrekker like this.
  12. makras

    makras Occasional commenter

    Thanks jubilee for the extensive explanation but like many other perplexed sheeple, I still have to understand then figure out where i am in this. I don't understand why simple things are made so complicated!

    I guess the less you understand the better it is for some.
  13. Gillimarie

    Gillimarie New commenter

  14. Gillimarie

    Gillimarie New commenter

    The pension rules are very complex. I have 45 years of contributions to the State Pension and still don't get the full amount as I was contracted out during my teaching career.There was no choice either way. I still had to buy one more year after I retired in order to get the maximum state pension possible. But it is worth doing to get the maximum amount you can get. I think it was about an extra £5 a week so not a hard decision.
    I retired in 2016 and claimed my TPS at age 63. I had a total of 31 years plus when you take off maternity and family raising time of about 15 years. I did supply and part time which gave me back 4 years of contributions. I was lucky that it was pensionable and organised by the LA in those days. Such a boost. I claimed my state pension in January. Finally!! After having to wait an extra 6 years from what I expected. I'm a 1950s lady! But I found out that you can claim it weekly. No questions asked. Just ring them and ask them. This means that they did not keep my state pension one week longer than necessary. Otherwise, it would have been paid in arrears the following month. It is a weekly benefit and you can claim it weekly without problem.
    I also got my bus pass. Yippee. Something free finally.
    Remember though, once you get your state pension, you pay more tax on your teachers' pension. It can make quite a difference and feels a bit sad. My tax went from about £80 to over £200. If you have a pension from the TPS over the allowance level, everything you get is taxed at 20% It can come as a bit of a shock if you are not expecting it.
    It does pay to make sure you are fully clued up on your pension. Check it regularly on the TPS website and that all your contributions have been credited. When I finally could log on, I found that much of my early service had not been logged. It took me three times to get credited for all my service. Also, when school became part of an academy, my pension contributions were incorrect. Also members of staff had a year of missing NI contributions. That is really hard to rectify and involves very many letters of complaint. Do keep checking, don't leave it to chance or hope it is right. It does pay in the end.
    It might seem years away, but things creep up fast, and you need to be aware of everything that is coming your way so there are no nasty surprises.
    Hope you find out all you need to know.
  15. lindenlea

    lindenlea Star commenter

    As @diddydave always advises - Wesleyan have specialist knowledge of teacher's pensions too so it's a good idea to arrange a meeting with them so you can ask all the questions you have.
    As for your state pension, in my opinion "contracting out" is not something to worry about. It does mean you don't receive the maximum state pension, but you benefitted from lower contributions at an earlier stage as hyou found out.
    Your teacher's pension is a good pension and is the one to do a bit of homework on, to maximise. You do need to know what you're doing when it comes to timing when you take the pension.
    When I read posts like @jubilee s and @diddydave s they do boggle me a bit and plenty of others confuse me too, but if you pick through the posts here and on Retirement too, there is useful info there.
    As some of us were saying the other day, even though your future pension sum may seem small compared to your current income, remember you will not be on higher rate income tax, you wont be paying NI or making superannuation contributions anymore.
    More info here.

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