...but the retirement years will condemn, Anthony Bailey says, if new teachers don't take time to sort out pension arrangements
Changing career and opting for teaching is a big step that provides plenty to think about. So some other things in your life may be pushed down the agenda, not least your pension arrangements. But when you retire you may come to regret having neglected your pension at the time of a career change.
Deciding to join the teachers' pension scheme is fairly easy for most new entrants to the profession. It's among the better employer's schemes around. You get a guaranteed, inflation-proofed pension of up to half your final salary (depending on the number of years' membership in the scheme), in addition to the basic state pension. You also get a tax-free lump sum equal to three years' pension. And there are valuable fringe benefits, including a dependant's pension and life insurance before you retire worth twice your pay.
But what about your pension arrangements before becoming a teacher? First comes the issue of what to do about pensions while you take a break to do a PGCE. If you have spare cash, you could pay into a stakeholder pension.
Stakeholder pensions are personal pensions provided by insurance companies and other financial institutions. You pay contributions into a tax-free fund and the provider can reclaim some tax relief to boost your contribution. You build up an investment fund to buy a pension when you retire.
You will be able to transfer the stakeholder fund to the teacher's scheme when you join it and, meanwhile, will have benefited from the tax perks while your money is in the scheme. But, fund charges and adverse investment performance could cancel out these perks if you pay into the plan over a short term.
An alternative is to save your money, for example, in a tax-free deposit-based individual savings account (ISA). You could then use the money to buy added years' membership (see below) of the teachers' pension scheme once you join it.
And that comes to the next issue: what to do about pension entitlements built up before you enter teaching? You can transfer benefits from previous pension schemes into the teachers' pension scheme, provided you do so within 12 months of starting to pay contributions to the teachers' scheme.
You need to get transfer-in pack 449, available from your employer or the teachers' pension scheme.
The scheme from which you transfer will work out a transfer value to be transferred to the teachers' scheme. This will be used to buy added years in the teachers' scheme.
The principle behind transfers is that you get the same pension in cash terms whether or not you transfer. This means that there is, in theory, no financial advantage in transferring. In practice, you may be better or worse off. The transfer value is based on a range of complicated actuarially-based assumptions of future inflation, investment returns and so on that may not turn out to be correct by the time you take your pension.
Likewise, the receiving teacher's pension scheme has to work out what that money can buy, based on assumptions which may not be much more than educated guesses. If you transfer from a final salary-based pension to the teachers' scheme, you could find that your money buys fewer years in the teachers' pension than you had in the previous one. But a year's membership of the teachers' pension might be worth more in cash terms, so that fewer years buy the same pension in cash terms as you had in the previous one.
However, each year of teachers' pension could eventually be worth more if you are promoted and get a higher salary when you retire. Bearing in mind that you cannot know in advance whether the teachers' pension or your old pension will eventually be worth more, transferring inevitably means taking a gamble. And the gamble could be greater if you are transferring from a personal pension or "money purchase" employer's company pension, where the eventual pension is based on investment performance rather than how much you earn.
In particular, some transfer values include early-leaving penalties, which cut the transfer value. It may be worth incurring a penalty if you reckon that, for example, you'll get promotion and that a higher retiring pay will more than make up for the penalty. Or you may feel it is safer to have your money in the teachers' pension than leaving it in an old, more risky scheme where a former employer may get into financial difficulties.
Transferring is never a straightforward decision. If in doubt, be prepared to pay for independent advice from a genuine pensions specialist.
The rule requiring transfers within 12 months does not apply if you want to transfer between the different teachers' schemes covering England and Wales, Scotland, Northern Ireland, the Channel Islands and Isle of Man.
Transfers between these schemes can take place at any time up to retirement. Similarly, you will be able to transfer out of the teachers'
pension scheme at any time before you reach the age of 59. You may want to do this if, for example, you leave teaching.
Finally, there is the issue of how to increase your pension once you are in the teachers' scheme. There are two basic options offered by the teachers'
scheme. First, you can buy "past added years" membership by paying a lump sum or committing yourself to regular extra monthly deductions.
Second, you can pay into an additional voluntary contribution (AVC) scheme.
Your money builds up in a tax-free fund and the pension you get will depend on the fund's performance. You could choose the official teachers' pension AVC scheme run by Prudential (details below).
An advantage of buying added years over AVCs is that you buy a guaranteed pension linked to your pay, rather than one based on the vagaries of unknown future investment performance.
AVC schemes you have paid into before entering teaching can be transferred to the Prudential scheme, but you cannot use them to buy added years in the main teachers' pension scheme.
Separate from the teachers' pension scheme, you can choose a free-standing AVC scheme from any provider, although the running costs (the amount you lose in charges) may be higher than the in-house scheme run by Prudential.
You can also pay into a stakeholder pension while belonging to the teachers' pension scheme, provided you earn no more than pound;30,000.
There are some differences between AVC schemes and stakeholder plans. The key one is that the fund in an AVC scheme must be used to buy a pension annuity, while you can take up to 25 per cent of a stakeholder pension as a tax-fee lump sum.
Your employer should be able to answer your questions on pensions issues.
Or contact the separate pension schemes direct: England and Wales, Tel: 01325 745 746, www.teacherspensions.co.uk; Scotland, Tel: 01896 893 000, www.scotland.gov.uksppa; Northern Ireland, Tel: 028 7131 9000, www.deni.gov.uk. The different schemes work in similar ways, with only minor differences.Information on the Prudential AVC scheme: www.pru-teachers.co.uk; or write to Prudential, Teachers' AVCs, Abbey Gardens, 55 King's Road, Reading RG1 3AH
Once you start full-time teaching, you will automatically become a member of the teachers' pension scheme and have contributions deducted at a rate of 6 per cent of your pre-tax pay, though you can choose to opt out.
Trainees on the graduate teacher programme are entitled to join the teachers' pension scheme. Some employers may discourage you from joining, either because they want to save money (since they have to make a contribution equal to 8.35 per cent of your pay) or they don't understand the rules.
If you are told that you are ineligible while you are on the graduate teacher programme, consult your union or get legal advice from an employment specialist. The Citizens' Advice Bureau may also be a useful first port of call if you don't belong to a union.
Part-time teachers don't automatically become members and must apply to join. Supply teachers who come through an agency (rather than being directly employed) cannot join.