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Thinking leaving the TPS - are my figures correct? Have I missed anything?

Discussion in 'Retirement' started by PeterQuint, May 4, 2019.

  1. PeterQuint

    PeterQuint Lead commenter

    From my calculations, I think I’m going to be better off leaving TPS.

    Can someone check my figures, and correct me if I’m wrong, or point out something I’ve forgotten.

    I turn 55 in about a year. My salary is just under £50,000. So I’m paying in just over £400 a month.

    So, over the next year I’ll be paying in £400 x 12 months = £4,800.

    Due to the inflation/wage rise re-adjustment, my Final Salary pension is falling by £26 a month. So over the next 12 months it’ll fall by £312. If I take my pension at 55 I need to reduce that for taking it early, multiplying by 0.796 = around £250.

    Now, my pension is already more than I need, so I’m wanting to convert any pension over and above this into a lump sum, for which you x12 for every £1 you drop. £250 x12 = £3000, so my additional lump sum from this part of my pension will be £3,000 less than it is now.

    Meanwhile, my average salary pension is increasing by around £70 a month. Over the next 12 months that’ll amount to a total increase of £840. Taking it early at 55 means multiplying by 0.546, leaving a total of £460. Convert to lump sum x12 = £5,520.

    So, one pension increases my lump sum by just over £5,500, whilst the other reduces it by £3,000, a net lump sum increase of £2,500.

    So, if I leave TPS now, I’m better off by not contributing £4,800. If I leave I’ll have to pay 20% income tax on that, so I’m only actually better off by £4,000. But in that same time my lump sum will only increase by £2,500.

    That looks to me like I’m better off leaving TPS now.

    Okay, what have I got wrong, or missed?
  2. FrankWolley

    FrankWolley Star commenter

    I wouldn't ever advise anyone on a forum like this - you really need specialist advice. But I do notice you don't mention death, in service, benefits, e.g. for a partner...
    PeterQuint likes this.
  3. PeterQuint

    PeterQuint Lead commenter

    I wasn't intending dying any time soon. ;)

    But I take your point.

    How much much worse off am I (the family) if I die whilst working but not the scheme?
  4. FrankWolley

    FrankWolley Star commenter

    The sort of question you really need to ask an expert, I'm afraid.
  5. Dorsetdreams

    Dorsetdreams Occasional commenter

    Peter, your careful calculations do depend on two points: "my Final Salary pension is falling by £26 a month" and "my pension is already more than I need".

    I have made many attempts at predicting the way my final salary will change but I have rather less confidence in my projections than you. In fact, the revalued salary statement I've had from TP has some anomalies which I am at a loss to explain and I'm not depending on those to help me make detailed projections.

    As for your second point: I do intend to take early retirement and I also intend to live a long time (who wouldn't?) but I'm very actively 'investing' time and effort in fitness, thought into what I eat etc. Long term income is much more important to me than lump sum. I quite understand that evaluating extra pension by its lump sum value aids in your calculation, but in my scenario at least this isn't logical. That cash can't buy anything as useful (for me at least) as the pension. As I mentioned in another thread, I'm finding that the Career Average pension is building up more quickly (ie adding more pension per year worked) than the Final Salary pension did, even after accounting for the larger adjustment for taking it at 55 (but not accounting for the loss of lump sum). This point alone is enough to persuade me to stay in the scheme.
    PeterQuint likes this.
  6. PeterQuint

    PeterQuint Lead commenter

    Cheers, very good points.

    Point 1 - You note that my final salary pension fall is unpredictable. That's right, but that cuts both ways, it could get better (not decrease as rapidly), but it could also get worse. Even if it doesn't budge at all, and I only take the average salary pension into account, that's a rise over the next 12 months of £5,600. As I will be paying in almost £5,000 in that time, at the very worst I'd lose just a few hundred quid. What I do know (or what I believe will happen) is that both of my pensions will rise in line with inflation. At the moment, that looks like being 2-3%. Even if the fall in my FS pension stops, I don't see its value increasing by 2-3%. It could, but it looks very unlikely indeed.

    Point 2 - On the lump sum vs higher pension, and knowing how much I'll need in retirement. I have a large mortgage balance. The amount I'll be converting, even without the final salary reduction, would only be £468 a year, which is £39, or £31 after tax. That's not enough to make a difference. If £1,000 a month won't be enough to live on in retirement, then £1,031 isn't likely to be either. That's the equivalent of doing just 4 days supply a year!
    Dorsetdreams likes this.
  7. diddydave

    diddydave Established commenter

    You can also increase the 'better-off' by amount by putting the £4800 into a private pension, not paying the 20% tax on it this year (tax would be £960), and then next year take it out and, so long as this doesn't push you into the higher tax bracket, you only pay tax on 75% of it, £3600, so losing £720 to the tax man.
    PeterQuint likes this.
  8. PeterQuint

    PeterQuint Lead commenter

    Good thinking.

    I'll actually be paying it off the mortgage. That'll be over a grand more in interest saved over the next 6 years.
  9. diddydave

    diddydave Established commenter

    Sounds good, if you save more than the £240 a year it works out better to do that. (Presume your mortgage is >6%) Also saves the hassle and risk of setting up a private pension.
    PeterQuint likes this.
  10. Prim

    Prim Occasional commenter

    Plus of course you will actually own your property. A huge worry off your shoulders.
    PeterQuint likes this.
  11. PeterQuint

    PeterQuint Lead commenter

    I've drilled down into the figures in post 1 a little further (it's never as simple as it first looks).

    I'm leaving my current job at the end of this academic year. I may, or may not be going into another teaching job. If I do, it'll almost certainly be less well-paid than my current job. I turn 55 in roughly 1 year.

    What I've calculated is, the difference in August is negligible, whether I stay now, or leave in August, and whether the Final Salary pension decreases or not. It's less than +/- £1,000 either way.

    Subsequently, I'm staying in the scheme until August. I'll be keeping an eye on my benefit statement until then, and making a further decision at the end of the summer.

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