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Hypothetical calculation

Discussion in 'Retirement' started by johnofford27, Oct 12, 2020.

  1. johnofford27

    johnofford27 New commenter

    Hi

    I retired at the end of August this year (2020).
    I deliberately opted out of the scheme for 2 months (1/3/19 to 30/4/19) to benefit from the hypothetical calculation.
    The initial calculations provided by the TPS hadn't taken this into account.

    Today I finally received updated and amended documentation which reflect this :)
    However, they appear now to have miscalculated my total service.;(
    The new documentation does take into account the hypothetical calculation, but for some reason they have NOT included my service of 388 days AFTER I re-joined the pension scheme. (1/5/19 to 31/8/20 at 0.8).
    I'm pretty sure this is an error on their part.
    Any insights would be welcome.
     
  2. diddydave

    diddydave Lead commenter

    Glad to hear about the first part in that they have done the HC.

    However, I'm afraid I may have bad(ish) news for you.

    There are two types of HC.
    • Unrestricted
    • Restricted
    The unrestricted calculation does use ALL of your service from before and after the break BUT to get this it depends on what salaries you had on either side of the break and only if your final salary (the one calculated to be your best in August this year) is higher than the one calculated at the break in April 2019 is it used.

    The restricted calculation uses only the service up to the break with the salary calculated at the break. It sounds, and with your break in April being so close to your final retirement is very likely to be, that this is what has happened to you.

    The most irritating part of this is that you have paid into the scheme from May 2019 to August 2020 - 15 months - and gained nothing for all those contributions! This is something I've helped people look at when I go through their figures because it happens very regularly for those who are close to retirement.

    The good news is that despite this you have ended up with a better pension because you opted out in March than if you had not. This happens because they will pay you the best pension from those two calculations. i.e.
    • The normal calculation to August 2020 using all of your service but what I presume is a lower 'final salary', and
    • The restricted hypothetical calculation to March 2019 using your service to that date and your, presumably, higher 'final salary'.
    I made a presentation on this here: https://docs.google.com/presentation/d/1VafqWV4kDex4k0uYrTwo47XtaVsbc3RHVAh6Xo3Z4es/edit?usp=sharing
     
  3. johnofford27

    johnofford27 New commenter

    Thanks for the detailed and informative response.
    Does this mean that the pensionable contributions I made for 16 months (1/5/19 to 31/8/20) count for nothing?
    If so, it may take a very long time for the slight increase I have received to offset the 16 monthly additional pension payments made.
    With hindsight, I should presumably have opted out on a permanent basis at the end of February 2019
     
  4. diddydave

    diddydave Lead commenter

    Yes I'm afraid that is exactly what it means and it's one of the most galling aspects of TPS not putting the hypothetical calculations on the benefit statement.

    I don't know if it is worse knowing it as you do or being completely oblivious to the fact that if they'd opted out they could have got a better pension!

    However, I wouldn't look at it as a case of the extra having to offset those 16 monthly payments. If you had been oblivious to the opt-out you would have paid 18 months of contributions AND may still have got a lower pension.

    This is why it is so important that everyone looks closely at their own situation as it can be a very fine line as to where, when or if opting out and back in works for their salary profile. Indeed, if your two figures are close then 61 more days in the scheme may have pushed your 'normal' calculation up a bit. (The exact difference would be 2/12th of 1/80th of the final salary used in your August 2020 calculation - roughly your final salary divided by 1000. i.e. a £40,000 final salary would have seen that August calculated pension go up by about £40 a year)

    Hindsight is a cruel teacher, don't spend too long pondering its lessons you have much to look forward to. Good luck with your new adventure(s).
     
    lindenlea likes this.
  5. johnofford27

    johnofford27 New commenter

    My revised pension sees an annual increase of £215.95, which in turn boosts my lump sum by about £650.
    I was on very close to 40K (working 0.8). According to my reckonings, my pensionable contributions were at 9.6%.
    40K x 0.096 = £3840 per year (£320 per month)
    £320 x 16 months = £5120

    £5120 - increase in lump sum £650 = £4470
    £4470 / £215.95 = 20.7 years.

    Presumably there are 3 scenarios.
    Worst case (oblivious to hypothetical calculation) lower pension + 18 months worth of contributions
    Middle case (see above)
    Best case (to have left pension scheme and not re-joined)

    Thanks for your insight.
     
  6. lindenlea

    lindenlea Star commenter

  7. diddydave

    diddydave Lead commenter

    Sorry forgot that was 2 months out and not 1 which means that on a £40,000 final salary it's about £80 a year less.
     
  8. diddydave

    diddydave Lead commenter

    That's pretty much spot on.

    Hindsight is an awful teacher, no-one can live up to its expectations and it is very unforgiving!

    Looking back at my own history I would have been best served opting out for a month and then back in to the scheme back in 2006; my actual salary then was around £40k but as I carried on teaching for another 11 years would have been overtaken by the time I retired and so been an unrestricted hypothetical.

    That would have led to a pension that I believe would have been about 25% higher! :(
     
  9. jphil

    jphil New commenter

    Hi diddydave, really enjoy your input and advice to the teachers on this forum.I took your advice last November and opted out as my best years were dropping off and were all 10 years plus ago.Would it be possible to have a look at my current benefit statement (via the private conversation link) as not sure on the various options to me. Would be really grateful!
     
  10. diddydave

    diddydave Lead commenter

    @johnofford27 - I don't suppose there is any chance that you were, at any time, moved into the Career Average scheme, because if you were then you may have a case against the scheme when the proposed remedy is implemented in that you would have built up some, small, pension in that scheme and the proposal is going to nullify that amount. They have put something in the scheme called a 'contingent decision' which could well apply to anyone who has a mix of schemes post 2015.
     
  11. diddydave

    diddydave Lead commenter

    Of course, no problem.
     
  12. HRHHenry

    HRHHenry New commenter

    Reading between the lines of this really informative thread I believe I might need to change my plans.It seems completely wrong that the scheme allows someone to lose out in this way. I d be really grateful for any advice. I'm in my 31st year of teaching. I opted out for a month in December 2019. I was planning to teach full time til July 2022 then do a further year at 0.8 ( and possibly take some benefits through phased retirement process) . From the above information , it appears that dropping to 0.8 would mean a restricted payment of the Hypothetical calculation ( as my salary at that point would be lower than at the point I opted out temporarily of TPS) ? Meaning my £360 approx payments per month for the best part of three years would be wasted? What could I do? Is phased retirement a bad idea for me ? Could I opt out of the pension whilst still working Full Time but then apply for phased retirement within three months? Should I opt out now?
    Thanks for any help
     
  13. dum1214

    dum1214 New commenter

    I was just wondering if the pension contributions really did cost £5120. Would they not have benefited from 20% tax relief so only cost £4096? Apologies if wrong. Was hoping to cheer up the OP.
     
  14. diddydave

    diddydave Lead commenter

    The dropping to 0.8 doesn't affect the comparison of salaries when it comes to working out whether you get the restricted or unrestricted hypothetical as they use the Full-Time-Equivalent (FTE) salary. The problem is that it is worked out to December 2019 and with the index uprating of your salaries to that point your 'final salary' in December 2019 is likely to be about 10% higher than your actual salary at that time. Inflation will help you from that point on but 3-4 years is going to be tight.
     
  15. jphil

    jphil New commenter

    Hi diddydave,one again thanks for the help how do we start a personal link again?
     
  16. HRHHenry

    HRHHenry New commenter

    So, is the key to achieving the unrestricted calculation, getting higher than inflation annual pay rises over the years between opting back in and retirement?
     
  17. diddydave

    diddydave Lead commenter

    The key is for the best 3-in-10 or last 12 months to rise above what it was in December 2019 - that figure gets fixed at that date and is not increased.

    For instance in December 2019 you could have the following:
    • Actual salary: £45,000
    • 'Final' salary : £50,000 (for many it is about 10% higher than the actual)
    From now on the target is for your salary to rise above that £50,000.
    Now, suppose you don't get any above inflation pay rises it is still possible for your salary when you finally leave to end up over that £50,000 figure. If you were to teach for another 10 years and inflation was 2% a year then your £45,000 salary would be revalued to about £55,000...so even if you only received a £1 actual pay rise every year of those 10 and end up with an actual salary of £45,010 your revalued new 'final salary' would be about £55,000 - overtaking the £50,000 that it was in December 2019 and giving you the unrestricted hypothetical.

    This is because the December 2019 figure is NOT revalued when checking if your latest salary has overtaken it but all the subsequent salaries are. The problem you have is that there are not many years from 2019 to the year you want to retire and so your lower salary does not have time to be revalued by inflation enough times to overtake it.
     
  18. diddydave

    diddydave Lead commenter

    Done :)
     
  19. diddydave

    diddydave Lead commenter

    :) you are right...
    ...but their calculation is nearly the same because the extra would also be taxed at 20%
     
  20. jphil

    jphil New commenter

    I must just add a big thank you to diddydave, who once again has helped me understand the minefield of teachers pensions, it would be so lovely if the system was nice and straight forward we might be able understand the various implications of certain actions ourselves, alas this is not the case. Thank you diddydave!
     
    asnac and diddydave like this.

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