Thanks very much for the video. First time I understand what the pension is actually about. The only worry I have now it is that the scheme seems so generous that I do not know about the viability in the long run! Thanks again for your work!
The long-term viability is an area that the Government looked into and is part of the reason why the move from a Final Salary to a Career Average scheme was undertaken. That scheme came with cost cap and floor limits that are reviewed every 4 years, the last being in 2019. At that time the scheme was overfunded and so should have led to either an increase in benefits to teachers or a decrease in contributions from employers/teachers, however, with the McCloud costs not factored in that was put on hold. The Government want to claw back the costs through the scheme rather than general taxation and although one of the judges in the case commented that it would be inequitable for the public sector to be asked to pay for the illegal action of the Government it seems likely that is exactly what will happen. That said, if the scheme had built up sufficient credit between 2015 and 2019 it would appear to be viable in the long-term seeing as everyone is going to moved on to the CA version next April anyway. A delay of 7 years (2015-2022) isn't going to be that significant in the long run, imo.
@@dfountain Thanks for the information. Thinking on the issue in the very long term, I just became 30 years old, in terms of investing more on the pension or using the money for another kind of product. Maybe I am too pessimistic, but not convinced about relying only on the financial health of England as a state for my future retirement. Not an economist but every indicator, Brexit and the very likely end of the Union, makes me believe that the country is going to become progressively poorer in the coming years. I hope I am wrong though. Thanks again for your work. I am learning a lot from the videos! Regards
That level of economics is beyond me but personally I cannot see any alternative investment being any more secure. In order to insulate yourself against the UK collapsing financially any investment would need to be based on a foreign economy and even then by still living in the UK you would be subject to the laws of the country which, in such a financial meltdown, could create barriers to foreign investment/realisation.
@@MultiNihilIf you are in England, the unlikely end of the Union would save England loads of money as the transfers made to Scotland, Northern Ireland and Wales would stop. Most of the taxes are raised in England as it stands due to population spread and where the big businesses are based.
Thanks, whilst my main focus and area of expertise is the Teachers' Pension Scheme almost all public sector pensions will be of this type in the future.
Good video and I like how you explain in simple terms. However, straight numbers can be disingenuous. Employer contributions, whilst sounding generous, are merely a salary sacrifice paid as pension contributions, private sector pay on average higher. Plus the money invested gets to grow at market rate so putting in X% doesn't take into account how much they grows in the market when you take X% out.
Even though this video is a few years old, it is still very important. I 've lost count of the amount of colleagues I hear say the pension isn't worth it! It should be compulsory viewing for NQTs!
In the last slide you had two figures, the total cost, roughly £104,000 and the teacher gets just under £20000 yearly. That means the teacher will get the cost back over 5 years. However this contradicts a previous slide which you show for the same teacher it will take 9 years from age 57. So which one is correct, getting the cost back in 5 or 10 years for the same teacher at age 57?
At the start I use the percentages to make a simple comparison and talk about the 'worst case' scenario - those where you don't get the 1.6% annual bonus - and I round the contribution rate to 10%. The actual time to recoup your investment depends on those three elements that I talk about at the time; the rates being paid (7.4% to 11.7%), how many years you work (the compounded 1.6% bonus will have more of an effect on years early in the career) and finally the actuarial reduction. The figure I came up with in that slide; 9.37 years represents a both a worst-case and a simplification. The final example uses a specific employment profile, one where the teacher never pays more than 9.6% - so already you can see it is better value than the worst case where I rounded it to 10%, and so can be more accurate so your calculation would be more in line with expectations - with one error. The pension income of £19,393 would be taxed, well a lot of it would be, and so dividing that into the £104,000 paid in wouldn't be accurate as the latter was after tax relief. But you make a good point. £19,393 using today's tax allowance of £12,570 would equate to £18,028.40 after tax. Dividing the £104,257.60 by this gives 5.8 years - much better than my worst case of 9.4 years.
Great video and really helpful as I'm in the early stage of my career and so nobody thinks we need to know this yet! Just wondering, if the employer contribution is never seen, what happens to it?
Oh...this is where I can get a little political and cynical - there is a long history to the story of pensions, most of which is about the workers getting the worst of it. However, to address your question. The employer contribution is, in the state sector, just a case of the Government giving the schools the money and then the schools paying it back to the Government - a purely paper exercise. My perception of this is that it is primarily a smoke-and-mirrors trick. The Government could increase the amount schools have to pay, give the schools the extra money to pay it and then get it all back in 'employer' contributions; this would allow them to 'claim' they have increased spending on schools without actually parting with one extra penny! There is a caveat to this though, part of the scheme includes limits on how much can be passed over and the scheme is 'valued' every 4 years. If the scheme has been overfunded then the limit states that the contributions have to be reduced or the benefits increased. The other part though is that not all schools are state funded, the private sector has had to find the increased contributions from other sources and so, at the moment, around 10% of private schools have withdrawn from the TPS. However, most schools still recognise that pension provision is a significant part of the remuneration package offered to teachers and that they could struggle to attract good teachers if they dropped it from their offer.
Thanks for this video, David. I just wanted to check. If a teacher were to leave teaching at 58 but didn't draw their teacher pension until they were 63, would the reduction be a ten year reduction or a five year reduction if their normal pension age is 68. Also, would the pension be inflation protected during this period? Thanks so much again for the videos
It is based on the age at which you start taking the pension, so in this case it would be a 5-year reduction. The pension is increased each April whether you are teaching or not, taking the pension or not. There is a bonus of 1.6% added to the accrued amounts if you are still teaching, or return to teaching within 5 years. This could leave to an opportunity for those with significant career average pension but having left teaching early to boost that pension. If they left at 58 and then returned say at 63, before 5 years had passed, their CA pension would get 5 lots of 1.6% boost added to it...an increase of over 8%. There appears to be one restriction to this, the rules do say that you need to be "employed" for 30 days in order to benefit from this, however it is my understanding that this could be achieved by entering a zero-hours contract with a school, not an agency, to do supply work and then do 2 days with a gap of at least 30 days between them.
Thanks so much for your response. It's really useful for long term planning. Just curious as to how you think a private pension invested in index funds via SIP compares to buying additional pension. I know it's a tricky one to comment on as returns are uncertain in a SIP. Just wondering how you think they stack up in terms of pros and cons. I've seen your really useful video comparing buying additional pension versus faster accrual.
@@LukeSmith-e8e It's a question of "risk" versus certainty, and flexibility. That and what happens if you die BEFORE you get to use either. RISK: With the TP you get absolute certainty. You know the value of what you are buying at the time because if is fully index linked. It does not beat inflation but it does not have to, matching inflation is guaranteed. If it buys you a meal out 10 times a year when you buy it then it should be able to do that every year once you start taking it. With a SIPP the performance against inflation relies on how the investments you make perform. You have a chance to do better and a change to do worse. FLEXIBILITY: With the TP you have no flexibility. Once you hand over your money you take the pension according to the rules of the scheme. You MUST take it at the same time as you take the rest of the pension. You can "sell" some of it for a lump sum but most of it comes in the form of an annual pension. With the SIPP you can use it in various ways and at various times. You do not have to take it at the same time as the TP so can either take it before the TP or leave as an emergency fund. You can take it out in cash, subject to income tax, or buy an annuity (pension) with it. ON DEATH: The TP has rigid rules and it depends on whether you have paid for "family benefits" at the time you bought it. If you did not then it dies with you,. If you have then your partner will get a fraction of what you bought (37.5%) and any dependent children up to half that amount again. A SIPP can be passed on to anyone on your death, just so long as you haven't yet used it to buy an annuity.
@@dfountainI agree. It's definitely a question of flexibility versus certainty. I suppose with retirement planning most of us would opt for certainty over an uncertain upside.
@@dfountainYou mention that on our death our partner gets 37.5% of the pension and I've also seen this on the TP pension site. However, they also say before 75 a lot. What happens if a teacher were to die after 75?
Hi David, thanks for your very illuminating calculation and comparison. I am wondering about the private pension alternative you discussed in the end: does the pensioner get to hold the 1.2 million money pot whilst buying into these products? If not, what is the point of buying these products as 1.2 million money would easily and safely yield 2% return rate annually (normally even higher with such a big pot of money)? This would certainly give the spouse and even the kids good protection other than just one third of the 20k. If yes, then it must be better than the TPS because you get the 1.2 million staying with your family which your kids could inherit despite any inheritance tax. Are there any specifics that I miss or am wrong about? Thanks.
You are correct but have missed one crucial point. The teacher in question is only putting in around £130,000 over their career and I would not assume they could turn that amount into a 1.2 million pot. Private pension schemes are dependent on their investments and as such have the potential to out perform other schemes but also the potential to crash. A teacher who does not join the TPS but instead opts to open a private pension scheme doesn't get anything extra from the employer to put into that scheme.
@@dfountain Haha, thanks for the reply David. That cleared my doubt. I know that the TPS is a fantastic deal (even the career average one which has revaluation rate every year as it makes great difference owing to the power of compound interest), but would like to make sure it is just not 10 times better than the private pension alternatives.
Not automatically. You get the option to "sell" some of your pension to the Government who will give you 12 times the amount sold back to them...not particularly good value in my opinion, something I explain in more detail here: th-cam.com/video/wiskpdazlpM/w-d-xo.html
On final salary scheme death payments to partners. Its stated as 1/160th. On a final salary pension of £10000 what would this be as a percentage. The average salary scheme is I think 37% of pension, easy to work out. Not quite sure how to work out the final salary scheme. Thanks for your help and interest. All the best.
For the Final Salary the teacher's pension is 1/80th. So 1/160th is half of that. So if the member (at aged 60) has a pension of £10,000 then the partner's pension is £5,000. It's complicated a little if the teacher has taken early retirement; if they went at 55 then the teacher's pension would be reduced from £10,000 to £8,110 but when they die their partner then gets half of what would have been the full pension...i.e. they still get £5,000. In the Career Average the basic amount is 37.5% of the teacher's pension and once again this is 37.5% of the full amount that, had the teacher waited until their Normal Pension Age, they would have got. So a teacher whose full CA pension was also £10,000 would leave their partner with a pension of £3,750. There is a slight difference though if the teacher dies 'in service'...in that event they also get half of what the teacher would have added to their pension between the date of their death and their normal pension age based on the salary they had at the time of their death. So a teacher, aged 57, who has built up a pension figure of £10,000 and who is earning £57,000, would add on £500 for each year from 57 to 67 - that is £5,000. So their partner would get £8,750.
No, the LGPS career average pension is only increased by inflation each year. It gets a better standard accrual rate though, 1/49th compared to 1/57th and the contribution rate you pay is roughly 2% less than those in the TPS.
In the UK the rate the school pays to be a part of the teachers' pension schemes is set by the Government. Currently that figure is 23.6% of your salary. However, the amount they pay is more of a red herring than any useful figure because the scheme pays the pensions based on the *rules* of the scheme and not the money paid in to it by the teachers and the schools. If the school contributions were increased to £1 million each it does not alter the rules of the scheme. In my opinion the school contribution is one of the biggest smoke-and-mirror tricks seen in the attack on the public sector pension schemes. For example. The contribution used to be 16%. It was put up to 23% and, for the state sector, the government gave schools the extra money needed to do this. Take a school budget for pay as £100,000. Pension contributions at 16% = £16,000. School is left with £84,000. Contributions increased to 23%, so school is given the extra £7000. Pension contributions at 23% = £23,000. School is left with £84,000. Net result is that the government can claim to have increased school spending significantly without actually costing them a single penny!
This is great, thank you David, there's aren't any videos at all really, explaining Career Average Pension. As a teacher this is really helpful!
Thank you for the positive feedback - the actual mechanics of the CA scheme is much simpler but it is still a good scheme.
Thank you. Brilliant video.
Thanks very much for the video. First time I understand what the pension is actually about. The only worry I have now it is that the scheme seems so generous that I do not know about the viability in the long run!
Thanks again for your work!
The long-term viability is an area that the Government looked into and is part of the reason why the move from a Final Salary to a Career Average scheme was undertaken. That scheme came with cost cap and floor limits that are reviewed every 4 years, the last being in 2019. At that time the scheme was overfunded and so should have led to either an increase in benefits to teachers or a decrease in contributions from employers/teachers, however, with the McCloud costs not factored in that was put on hold. The Government want to claw back the costs through the scheme rather than general taxation and although one of the judges in the case commented that it would be inequitable for the public sector to be asked to pay for the illegal action of the Government it seems likely that is exactly what will happen. That said, if the scheme had built up sufficient credit between 2015 and 2019 it would appear to be viable in the long-term seeing as everyone is going to moved on to the CA version next April anyway. A delay of 7 years (2015-2022) isn't going to be that significant in the long run, imo.
@@dfountain Thanks for the information. Thinking on the issue in the very long term, I just became 30 years old, in terms of investing more on the pension or using the money for another kind of product. Maybe I am too pessimistic, but not convinced about relying only on the financial health of England as a state for my future retirement. Not an economist but every indicator, Brexit and the very likely end of the Union, makes me believe that the country is going to become progressively poorer in the coming years. I hope I am wrong though.
Thanks again for your work. I am learning a lot from the videos!
Regards
That level of economics is beyond me but personally I cannot see any alternative investment being any more secure. In order to insulate yourself against the UK collapsing financially any investment would need to be based on a foreign economy and even then by still living in the UK you would be subject to the laws of the country which, in such a financial meltdown, could create barriers to foreign investment/realisation.
@@MultiNihilIf you are in England, the unlikely end of the Union would save England loads of money as the transfers made to Scotland, Northern Ireland and Wales would stop. Most of the taxes are raised in England as it stands due to population spread and where the big businesses are based.
Clear and Simple !
First Rate !
Tells U everything U need to know about Public Sector Pensions 👍
Thanks, whilst my main focus and area of expertise is the Teachers' Pension Scheme almost all public sector pensions will be of this type in the future.
Thanks v. Much for reply. Was having a hard time trying to work it out. So helpful to have that explained. Really do appreciate it.
Glad it helped!
Good video and I like how you explain in simple terms. However, straight numbers can be disingenuous. Employer contributions, whilst sounding generous, are merely a salary sacrifice paid as pension contributions, private sector pay on average higher. Plus the money invested gets to grow at market rate so putting in X% doesn't take into account how much they grows in the market when you take X% out.
Even though this video is a few years old, it is still very important. I 've lost count of the amount of colleagues I hear say the pension isn't worth it!
It should be compulsory viewing for NQTs!
In the last slide you had two figures, the total cost, roughly £104,000 and the teacher gets just under £20000 yearly. That means the teacher will get the cost back over 5 years. However this contradicts a previous slide which you show for the same teacher it will take 9 years from age 57. So which one is correct, getting the cost back in 5 or 10 years for the same teacher at age 57?
At the start I use the percentages to make a simple comparison and talk about the 'worst case' scenario - those where you don't get the 1.6% annual bonus - and I round the contribution rate to 10%. The actual time to recoup your investment depends on those three elements that I talk about at the time; the rates being paid (7.4% to 11.7%), how many years you work (the compounded 1.6% bonus will have more of an effect on years early in the career) and finally the actuarial reduction. The figure I came up with in that slide; 9.37 years represents a both a worst-case and a simplification.
The final example uses a specific employment profile, one where the teacher never pays more than 9.6% - so already you can see it is better value than the worst case where I rounded it to 10%, and so can be more accurate so your calculation would be more in line with expectations - with one error. The pension income of £19,393 would be taxed, well a lot of it would be, and so dividing that into the £104,000 paid in wouldn't be accurate as the latter was after tax relief.
But you make a good point.
£19,393 using today's tax allowance of £12,570 would equate to £18,028.40 after tax. Dividing the £104,257.60 by this gives 5.8 years - much better than my worst case of 9.4 years.
Great video and really helpful as I'm in the early stage of my career and so nobody thinks we need to know this yet! Just wondering, if the employer contribution is never seen, what happens to it?
Oh...this is where I can get a little political and cynical - there is a long history to the story of pensions, most of which is about the workers getting the worst of it.
However, to address your question. The employer contribution is, in the state sector, just a case of the Government giving the schools the money and then the schools paying it back to the Government - a purely paper exercise. My perception of this is that it is primarily a smoke-and-mirrors trick. The Government could increase the amount schools have to pay, give the schools the extra money to pay it and then get it all back in 'employer' contributions; this would allow them to 'claim' they have increased spending on schools without actually parting with one extra penny!
There is a caveat to this though, part of the scheme includes limits on how much can be passed over and the scheme is 'valued' every 4 years. If the scheme has been overfunded then the limit states that the contributions have to be reduced or the benefits increased.
The other part though is that not all schools are state funded, the private sector has had to find the increased contributions from other sources and so, at the moment, around 10% of private schools have withdrawn from the TPS. However, most schools still recognise that pension provision is a significant part of the remuneration package offered to teachers and that they could struggle to attract good teachers if they dropped it from their offer.
Great video David - can you share a link to your spreadsheet, please?
Hi Chris, thanks. I put links to all my spreadsheets on this page: dfountain.co.uk/category/resources/
Thanks for this video, David. I just wanted to check. If a teacher were to leave teaching at 58 but didn't draw their teacher pension until they were 63, would the reduction be a ten year reduction or a five year reduction if their normal pension age is 68. Also, would the pension be inflation protected during this period? Thanks so much again for the videos
It is based on the age at which you start taking the pension, so in this case it would be a 5-year reduction.
The pension is increased each April whether you are teaching or not, taking the pension or not.
There is a bonus of 1.6% added to the accrued amounts if you are still teaching, or return to teaching within 5 years.
This could leave to an opportunity for those with significant career average pension but having left teaching early to boost that pension. If they left at 58 and then returned say at 63, before 5 years had passed, their CA pension would get 5 lots of 1.6% boost added to it...an increase of over 8%. There appears to be one restriction to this, the rules do say that you need to be "employed" for 30 days in order to benefit from this, however it is my understanding that this could be achieved by entering a zero-hours contract with a school, not an agency, to do supply work and then do 2 days with a gap of at least 30 days between them.
Thanks so much for your response. It's really useful for long term planning.
Just curious as to how you think a private pension invested in index funds via SIP compares to buying additional pension. I know it's a tricky one to comment on as returns are uncertain in a SIP. Just wondering how you think they stack up in terms of pros and cons.
I've seen your really useful video comparing buying additional pension versus faster accrual.
@@LukeSmith-e8e It's a question of "risk" versus certainty, and flexibility. That and what happens if you die BEFORE you get to use either.
RISK:
With the TP you get absolute certainty. You know the value of what you are buying at the time because if is fully index linked. It does not beat inflation but it does not have to, matching inflation is guaranteed. If it buys you a meal out 10 times a year when you buy it then it should be able to do that every year once you start taking it.
With a SIPP the performance against inflation relies on how the investments you make perform. You have a chance to do better and a change to do worse.
FLEXIBILITY:
With the TP you have no flexibility. Once you hand over your money you take the pension according to the rules of the scheme. You MUST take it at the same time as you take the rest of the pension. You can "sell" some of it for a lump sum but most of it comes in the form of an annual pension.
With the SIPP you can use it in various ways and at various times. You do not have to take it at the same time as the TP so can either take it before the TP or leave as an emergency fund. You can take it out in cash, subject to income tax, or buy an annuity (pension) with it.
ON DEATH:
The TP has rigid rules and it depends on whether you have paid for "family benefits" at the time you bought it. If you did not then it dies with you,. If you have then your partner will get a fraction of what you bought (37.5%) and any dependent children up to half that amount again.
A SIPP can be passed on to anyone on your death, just so long as you haven't yet used it to buy an annuity.
@@dfountainI agree. It's definitely a question of flexibility versus certainty. I suppose with retirement planning most of us would opt for certainty over an uncertain upside.
@@dfountainYou mention that on our death our partner gets 37.5% of the pension and I've also seen this on the TP pension site. However, they also say before 75 a lot. What happens if a teacher were to die after 75?
Hi David, thanks for your very illuminating calculation and comparison. I am wondering about the private pension alternative you discussed in the end: does the pensioner get to hold the 1.2 million money pot whilst buying into these products? If not, what is the point of buying these products as 1.2 million money would easily and safely yield 2% return rate annually (normally even higher with such a big pot of money)? This would certainly give the spouse and even the kids good protection other than just one third of the 20k. If yes, then it must be better than the TPS because you get the 1.2 million staying with your family which your kids could inherit despite any inheritance tax. Are there any specifics that I miss or am wrong about? Thanks.
You are correct but have missed one crucial point. The teacher in question is only putting in around £130,000 over their career and I would not assume they could turn that amount into a 1.2 million pot.
Private pension schemes are dependent on their investments and as such have the potential to out perform other schemes but also the potential to crash. A teacher who does not join the TPS but instead opts to open a private pension scheme doesn't get anything extra from the employer to put into that scheme.
@@dfountain Haha, thanks for the reply David. That cleared my doubt. I know that the TPS is a fantastic deal (even the career average one which has revaluation rate every year as it makes great difference owing to the power of compound interest), but would like to make sure it is just not 10 times better than the private pension alternatives.
For career average , do we not get a lump sum?
Not automatically.
You get the option to "sell" some of your pension to the Government who will give you 12 times the amount sold back to them...not particularly good value in my opinion, something I explain in more detail here: th-cam.com/video/wiskpdazlpM/w-d-xo.html
On final salary scheme death payments to partners. Its stated as 1/160th. On a final salary pension of £10000 what would this be as a percentage. The average salary scheme is I think 37% of pension, easy to work out. Not quite sure how to work out the final salary scheme. Thanks for your help and interest. All the best.
For the Final Salary the teacher's pension is 1/80th. So 1/160th is half of that. So if the member (at aged 60) has a pension of £10,000 then the partner's pension is £5,000. It's complicated a little if the teacher has taken early retirement; if they went at 55 then the teacher's pension would be reduced from £10,000 to £8,110 but when they die their partner then gets half of what would have been the full pension...i.e. they still get £5,000.
In the Career Average the basic amount is 37.5% of the teacher's pension and once again this is 37.5% of the full amount that, had the teacher waited until their Normal Pension Age, they would have got. So a teacher whose full CA pension was also £10,000 would leave their partner with a pension of £3,750. There is a slight difference though if the teacher dies 'in service'...in that event they also get half of what the teacher would have added to their pension between the date of their death and their normal pension age based on the salary they had at the time of their death. So a teacher, aged 57, who has built up a pension figure of £10,000 and who is earning £57,000, would add on £500 for each year from 57 to 67 - that is £5,000. So their partner would get £8,750.
Hi David
I’m in the LGPS scheme. Is our pension boosted by the 1.6% too?
No, the LGPS career average pension is only increased by inflation each year. It gets a better standard accrual rate though, 1/49th compared to 1/57th and the contribution rate you pay is roughly 2% less than those in the TPS.
Thank you for taking the time to reply 😊
Hi David. Thank you for the informative video. Is there a way to find out how much my school contributes? Or is it done by my local authority?
In the UK the rate the school pays to be a part of the teachers' pension schemes is set by the Government. Currently that figure is 23.6% of your salary.
However, the amount they pay is more of a red herring than any useful figure because the scheme pays the pensions based on the *rules* of the scheme and not the money paid in to it by the teachers and the schools. If the school contributions were increased to £1 million each it does not alter the rules of the scheme. In my opinion the school contribution is one of the biggest smoke-and-mirror tricks seen in the attack on the public sector pension schemes.
For example. The contribution used to be 16%. It was put up to 23% and, for the state sector, the government gave schools the extra money needed to do this.
Take a school budget for pay as £100,000.
Pension contributions at 16% = £16,000. School is left with £84,000.
Contributions increased to 23%, so school is given the extra £7000.
Pension contributions at 23% = £23,000. School is left with £84,000.
Net result is that the government can claim to have increased school spending significantly without actually costing them a single penny!