New pension rules will allow teachers to save thousands of pounds in tax when they pay money into their retirement funds and when they take it out.

The flexibilities introduced this month remove the cap that prevented teachers from paying more than 15 per cent of their salaries into pension funds.

Now they can pay unlimited amounts tax-free into a top-up scheme run for teachers by Prudential. The new rules will, for the first time, also enable teachers to take up to a quarter of this top-up fund out after retirement as a tax-free lump sum.

Teaching unions, who are expecting many members to take advantage of the flexibilities, have welcomed the changes.

The move follows their success last October when ministers backed down and withdrew a plan to increase the normal pension age from 60 to 65 for existing teachers in the face of threatened industrial action. But this unpopular change will still apply to teachers who start their first post after September 2006.

Delegates at this week’s Easter union conferences were pushing for their leaders to build on their victory and do more to protect public-sector pensions.

Support staff are in the middle of a campaign of strike action to prevent similar changes being made to their pension scheme.

The new teacher flexibilities relax the old rules under which staff paid 6 per cent of their salary into the main teachers’ pension scheme and up to 9 per cent more that could be divided between the Prudential top-up fund and a separate “added years” scheme, allowing members to make contributions for years they might have missed.

Today the 6 per cent on the main scheme remains, with a 9 per cent limit on the added years scheme. But teachers can now pay as much as they want out of the remaining 85 per cent of their salary into the Prudential fund.

Debbie Falvey, who manages this fund, said: “We have had a lot of interest in this from teachers so we expect quite a few to increase their payments.”

Those who pay into the scheme, currently around 160,000, now also have the flexibility to withdraw as much as 25 per cent of the fund, tax-free, when they retire.

The remaining three-quarters must still be used to purchase an annuity scheme, which will give them a guaranteed income that will be taxed.

Mike Beard, National Association of Head Teachers assistant secretary for pensions, said: “This is giving teachers added choice and because it is tax-free I think many will want to benefit.

“But people do need to realise that whatever they take out as a lump sum will reduce the value of the annual income they can purchase with the rest of the fund.”

Ms Falvey said some of the top-up funds were already worth pound;50,000 by retirement. But she said the new rules, combined with the fact that the scheme was still relatively young having been introduced in 1989, meant values were likely to increase substantially in the future.

* william.stewart@tes.co.uk