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One for DIddydave!

Discussion in 'Retirement' started by HannahD16, Jan 18, 2020.

  1. HannahD16

    HannahD16 New commenter

    Right! Need advice from those of you with a mathematical brain please. I would like to know what would happen re:compounding effect of purchase of additional pension with potential inflation and revaluation etc.
    I know there are lots of unknowns so I’m only after a best guess please

    Hypothetical scenario
    Aged 53
    Some FS pension, ideal retirement age 60
    5 years in CARE and awaiting outcome of firefighters decision
    Want to add an an additional 3k pa to my FS pension as additional pension over next 7 years to help offset lost years when I was raising my family etc

    My question is, what is the potential end result of this after 7 years (revaluation etc)?

    Is it worth my while or should I just invest in more wine to pass the 7 years?!
     
  2. diddydave

    diddydave Established commenter

    The Additional Pension will increase with inflation but will also be reduced if you take it early.

    When you pay monthly I'm not sure of a few things:
    1) Is the £3k revalued from the first day of electing to purchase it or is there a sliding scale to reflect when you've made each payment.
    2) Is the monthly amount fixed for the 7 years or is it also increased by inflation (if it isn't then this would be very good value IF we entered periods of high inflation - if they were matched with pay raises.)

    The £3k pension costs £62,596.80 in total over 7 years. So it would take about 21 years into your retirement (age 81) for you to get your money back. With family benefits the cost is £66,124.80 - so it takes just over 1 more year to get this back.

    The lump sum cost is £53,280.00 which makes me think that the answer to 2) above is that the monthly repayment aren't increased.

    In terms of 'is it worth' it you don't really need to work out what the £3k will be in numbers in 7 years time simply because it IS index-linked...it should be worth then what it is now. (So if £3k buys 3000 loaves of bread now it should buy the same number of loaves of bread in 7 years time no matter what the price of a loaf of bread is ;) )
     
  3. Sundaytrekker

    Sundaytrekker Star commenter

    I’ll leave the serious maths to diddydave but I bought £1500 a year additional pension over nine years by monthly payment. My payments were only changed once about six years in when there was a revaluation of the scheme. At that point, I was given the choice to increase my payments by a relatively small amount to keep on track for what I thought I was getting, carry on with the same payment for slightly less or stop altogether. I paid the extra amount. When I retired I was pleased that the inflationary upgrade took the £1500 to nearly £2000 a year. I chose not to take any lump sum from this (despite the extra tax advantage) as I wanted maximum income for life. I’ve been pleased with it.
     
  4. diddydave

    diddydave Established commenter

    Great, thanks for the confirmation...£1500 to £2000 over 9 years is about 33%/9 ~ 3% a year which very much sounds as though the whole sum was revalued over the 9 years.
     
    Sundaytrekker likes this.
  5. letap

    letap Occasional commenter

    Hannah,

    If you are a 40% tax payer and are for the rest of the seven years you pay for the additional pension, then this payment into the teachers pension will be highly tax efficient.

    The alternative is that you could open a SIPP which would be topped up by a 20% tax credit by the SIPP provider, leaving you to claim additional tax relief via a tax return. The benefits of the SIPP are that you can claim from the pot at age 55 with 25% of the pot claimed tax free. The SIPP is more flexible - you can vary your drawdown and the remaining pot can be inherited. Clearly the disadvantage is that some investments are risky and the pot could shrink in size.

    There is also the AVC which is also tax efficient - which is provided by the Prudential - admittedly I do not much about this:
    https://www.pru.co.uk/rz/teachers/#investmentchoices
     
    HannahD16 likes this.
  6. HannahD16

    HannahD16 New commenter

    Thank you all. I just find that having cleared a couple of debts at the end of 2019 I am in the position of either blowing my few extra quid or putting it to good work for later.
    I read something today which made me stop and think - “don’t get so caught up in making a living that you forget to make a life!”

    On the other hand, as children, we were brought up with so little money (though v happy) but lack of money was a constant feature and I understand (now as an adult) it was a real and constant worry. I am v grateful for a family and a (however flawed) social system that allowed me to achieve what I have done and to be in the position I am. I have to be honest, sometimes I do feel like Scrooge, projecting what I might have to live on and oblivious to the here and now!
    I watched my elderly parents struggle to make ends meet in their later years (and I had so little at that time in my life to spare to help them) that I vowed to myself that I will not end up in the same position if I could help it.

    Sorry, a bit more existential than mere money but there you go. Thanks for listening!
     
  7. diddydave

    diddydave Established commenter

    Letap makes a good point about other forms of investing. I did go for the AVC route, they'd just shut the door on buying additional years, and I was looking for something independent of the TPS so that it could be used without taking AAB reductions. I wasn't aware at the time of any other options for paying into the TPS which is a shame and is now something I'd urge all teachers - including those in their 30s - to look into...starting early is significantly cheaper.

    There's another thread on this here: https://community.tes.com/threads/additional-pension-or-isa.798316/
     
  8. diddydave

    diddydave Established commenter

    Good quote...you are where you are but can go anywhere you choose from this point on.
     

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