Handle with care

31st May 1996 at 01:00
Changes in the law on pensions are allowing a few relatively highly-paid teachers to retire early. But some financial advisers are urging caution, as Susannah Kirkman reports. Could a new type of pension provide an early route out of teaching? Peter Halls-Dickerson, who has recently retired at 58 after 26 years as a head, thinks it might - with potentially embarrassing consequences for the Treasury.

Instead of waiting another year before claiming his pension and embarking on his new career as an educational consultant, Mr Halls-Dickerson has left the Teachers' Superannuation Scheme (TSS) and invested in a private scheme. Last year's Finance Act entitles investors to put their pension fund on the stock market, while continuing to draw cash from it. An annuity does not have to be bought until they reach 75, when interest rates could be higher. This system is known as a "managed pension".

The sum in Mr Halls-Dickerson's private pension is based on the actuaries' transfer value assessment; it is what the Teachers' Pensions' Agency would pay him if he lived for the rest of his natural life span.

Mr Halls-Dickerson's managed pension enables him to draw between 35 and 100 per cent of the maximum amount which would be paid out by a conventional annuity, and he has received his tax-free lump sum a year earlier than if he had stayed on to normal retirement age. He reckons that he is entitled to draw around Pounds 1,500 more a year than he could have got through the TSS because his money has been more advantageously invested.

If Mr Halls-Dickerson dies before his wife, she will receive the remaining cash in the fund, less 35 per cent tax, instead of a TPA pension of less than Pounds 10,000 a year. If his wife dies first, he can leave the remaining funds to his estate; his pension assets will not die with him.

But he sees the main benefit as the chance to start a new life a year early. "Friends say I look 15 years younger, and that's how I feel," says Mr Halls-Dickerson, who was head of Collingwood College in Camberley, Surrey - one of the biggest schools in the country.

Brent Nicholson of Nicholson Financial Management, Mr Halls-Dickerson's financial consultant, reckons that moving pension funds had allowed about 10 headteachers to take early retirement. If the trend develops, the results for the Treasury could be painful; as the teachers' pensions' fund is notional, any pay-outs come directly from the Treasury, which is already concerned by the record numbers taking early retirement.

But the catastrophic effects of ill-advised personal pensions for teachers in the 1980s still loom large; both financial advisers and teaching unions urge caution to anyone considering withdrawing from the TSS.

"They need to be very careful and keep their eyes wide open," warns Kevin Stratford of the independent financial advisers, Berry, Birch and Noble. "I am particularly concerned about people coming out of the teachers' pensions scheme because it is a good one."

Simon Philip, director of personal financial planning at Binder Hamlyn, advises a meticulous appraisal of the benefits of both schemes. The TSS is index-linked and guaranteed.

Kevin Stratford says charges for a managed pension can quickly eat away at the fund. A standard insurance company package could cost 5 per cent of the fund, plus a 1 per cent annual management fee and administration costs every time the scheme is adjusted.

Mr Stratford suggests that a route involving several insurance companies, rather than one, could be cheaper. And Brent Nicholson says that growing competition between suppliers of managed pensions could reduce charges.

Investing money on the Stock Exchange is obviously riskier than relying on the TSS, but the risk can be spread. Mr Halls-Dickerson has chosen a Skandia package which offers a choice of more than 230 funds, some of which are guaranteed not to drop by more than 0.5 per cent in any one quarter. Some will not lose more than 2.4 per cent, again, in any one quarter, while others are in more volatile Far Eastern and emerging markets.

Financial advisers are unanimous that Mr Halls-Dickerson's escape route only suits relatively highly-paid teachers, as a pension fund should be worth at least Pounds 100,000 and preferably Pounds 200,000 to provide sufficient returns. This would usually restrict it to secondary heads. Someone with 35 years' service on a salary of Pounds 42,000 would probably have a pension fund worth around Pounds 280,000, for instance. Anyone wanting to check the value of their pension fund can ask the TPA for a transfer value assessment after the age of 50. Any transfer has to be applied for before the pension-holder's 59th birthday.

A teacher who needs a fairly large pension straightaway would also be unsuited to the scheme, as the fund could start shrinking instead of growing. According to Scottish Amicable, if a 58-year-old man took the maximum Pounds 14,343 annually from a fund of Pounds 187,000, his income would drop to Pounds 13,005 by 63 even if the fund grew by 9 per cent a year. If he continued at this rate until 75 before buying an annuity, he would be left with Pounds 9,876 a year.

The ideal candidate is someone like Mr Halls-Dickerson, who draws little from the fund as he is still working, this time as director of his own educational consultancy, PHD Associates, which deals with companies offering services to schools.

Ill-health could be another reason for choosing a managed pension, as someone who dies soon after retirement could leave the bulk of their fund to their spouse.

Unsurprisingly, the TPA response is lukewarm. A spokesman said there was no sign that substantial funds were being withdrawn before retirement. "I can't imagine it would catch on. Most people are too sensible."

For further information, contact: Berry, Birch and Noble, 0171 631 1919, Nicholson Financial Management 01252 626985. Independent Financial Adviser Promotions 0171 831 4027 will provide a list of five independent advisers in your area

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