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And the benefits are...

Commuting is not just about how you get to work, it is a crucial part of how your pension is calculated. Sue Ward gets to grips with ministers' modernisation proposals

The driving force behind the review of teachers' pensions has been the Government's wish to move the normal retirement age, right across the public sector, from 60 to 65. They are willing to recycle some of the money saved by this into the benefit package, and so over the past year or more they have been discussing what changes there could be.

A consultation document (available on was launched in the autumn of 2004. The Teachers' Pension Scheme is, and is planned to remain, a "final salary" scheme. For most people, this means that the pension is based on their salary as they come up to retirement.

Currently, these earnings are divided by 80 and multiplied by the number of years they have belonged to the pensions scheme (and fractions of a year) to determine the pension. Then that figure is multiplied by three to give the lump sum which is paid tax-free on retirement.

Most private-sector pension schemes use a different calculation. A good private-sector scheme starts with a higher pension and then allows you to sell back (called "commuting") some of your pension for a lump sum. The proposal for the TPS is that the pension for future service would be calculated at 160th for each year of service, and then for every pound;1 of pension you give up, you would get a pound;12 lump sum tax-free.

A 160ths scheme would give Janna (see box) more pension, and give her the choice on how much she spent on buying a lump sum. (There are complex tax rules which limit the amount you can take in this way). If teachers follow their private-sector counterparts, almost everyone will take the maximum cash. However, the "sale price" of pound;12 for each pound;1 of pension, suggested in the consultation document, is on the mean side given how long people can expect to live.

Teachers responding to the consultation liked this idea, but the proposals on ill-health retirement were much less popular. As for other early retirements, the issue is cost. Someone who takes their pension five years early is paying contributions for five years less and drawing for five years longer. So either the pension costs more, or the same amount of money is spread over a longer period by making each payment smaller.

Currently, teachers over 55 can choose to take actuarially reduced benefits (ARBs) - a pension based on service and pay at the date of retirement, but then reduced because of the early payment. Someone leaving at 59, for example, gets 94 per cent of their full pension. Teachers who are made redundant over the age of 50 can be given a full, unreduced pension, but since the extra cost has to be met by the employer at the time, this is rarely done.

From 2010, the earliest age at which people can take an early retirement pension (except due to ill-health) will change to 55 rather than 50, across the board, not just for teachers. People will be able to draw a pension and carry on working for the same employer, creating some new flexibility, which the consultation found would be popular with teachers. Employers want more choice about what they can offer on redundancy.

The Department for Education and Skills is also worried about the new age discrimination law, due to come into force in October 2006. So the consultation document floats the idea of providing a cash lump sum on redundancy, not related to age or length of service, and letting people buy extra pension from that if they wish.

We know that the TPS will extend its spouses' benefits to those in the new "civil partnerships" for same sex couples, due to start in December this year. It's also proposing that spouses' pensions should be payable to unmarried partners as well as widows or widowers, and that it should not stop if the spouse or partner remarries. However, unless members were willing to pay more, these benefits would be paid at the same rate as they are now (1160th for each year of the member's service, with some extra credited years) rather than moving to a higher rate as with the member's pension.

The next stage is a more formal consultation on new regulations firming up the plans. The new provisions will probably begin in September 2006.

Sue Ward is is an independent pensions expert and author

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