This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Some key changes came to the teachers’ pension scheme from April 2022. Depending on the time you qualify to receive a teachers’ pension, it may no longer be possible for you to access a “final salary pension” (i.e. where you receive a guaranteed, lifetime income in retirement based on what you earned near/at retirement). Instead, from April 2022 the system is moving towards a “career average scheme”. Below, our financial planning team at Elmfield in Padiham, Burnley explains how these changes work and some implications for teachers’ retirement planning.
The Teachers’ Pension Scheme
Most UK workers are put onto a workplace pension automatically via the auto enrolment rules. This usually takes the form of a “defined contribution” pension – that is, a pension “pot” which you and your employer contribute to. In 2022-23, an employee on this scheme must contribute at least 5% and the employer 3% minimum.
Other workers (more common in the public sector) are placed onto a defined benefit scheme, whereby the employer promises to pay a guaranteed lifetime income when the worker retires. The annual amount depends on factors such as years of service and average pay. Final salary schemes are usually defined benefit pensions which take your salary at/near retirement into account when making the calculations – rather than average earnings throughout a career.
Until April 2022, this latter approach is how the Teachers’ Pension Scheme largely worked. Yet there are four “categories” which members can fall into, which affect the contributions that both you and your employer are obliged to make:
- ‘Protected’ scheme members: This is likely your category if you were an active member before 2012 and were 10 years (or less) from retirement age.
- ‘Tapered’ members: Your membership started before 2012 and had fewer than 13.5 years before you reached pension age.
- ‘Transition’ members: Prior to 1st April 2012 you had over 13.5 years until you reached retirement age.
- ‘New’ members: You became a scheme member on/after 1st April 2015.
The recent April 2022 changes
There was a recent legal ruling which determined that younger Teachers’ Pension Scheme members were being discriminated against in how their pensions were calculated. As such, from 1st April 2022 all members have been moved to a “career average scheme”.
This means that your retirement income from the scheme will be largely based on your pensionable earnings for each year you are a scheme member. No longer will it be determined by your earnings close to (or at) the time of retirement.
For many teachers, this is likely to represent a reduction in income from the Teachers’ Pension Scheme. After all, your average career earnings are likely to be lower than what you make just prior to retirement – by which point you have moved up the teacher pay scales.
Older teachers may be encouraged to hear that they may be given a choice over whether to take a final salary or career average option e.g. those who have already accrued most of their pension). However, younger teachers are likely to benefit from financial advice about the best way to maximise their teacher’s pension in light of these new changes.
Bear in mind that an average career earnings approach takes into account all of your earnings across your teaching career – including entry-level salaries. This is likely to drag down the eventual income you receive from the scheme. This could mean that many teachers choose to work more years, to make up for the loss.
Implications for teachers
Although the 1st April 2022 changes are likely to be unwelcome news for many teachers, it is still a good idea (generally speaking) to remain part of the scheme. Be careful not to opt out due to frustration. Bear in mind that the Teachers’ Pension Scheme is still incredibly generous next to many other workplace pensions. In 2022-23, employers make a flat contribution of 23.68% regardless of what you need to contribute. In the private sector, employers are obliged only to contribute 3% of an employee’s salary.
Also, your teachers’ pension is linked to the Consumer Price Index (CPI), which means that it will rise each year in line with the cost of living. Again, most private sector pensions (which are based on a “defined contribution” model) do not offer this.
It is important to discuss your retirement goals with a professional, to make sure you can afford the lifestyle you want. Remember, there is no “average teacher’s pension”. For instance, if you work for 25 years as a teacher but never earn a senior salary, then your scheme income may be lower than someone who has worked fewer years but primarily in senior roles.
A financial adviser can also help you prepare for what happens to your pension when you die. This largely depends on your salary category. For example, if you die whilst still employed as a teacher, then your next of kin will likely receive a final salary or career average. Those who die after starting collecting their pension should have income diverted to their surviving spouse or civil partner (although at a lower rate).
Invitation
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938
