To make sure your retirement is what you have dreamed of, keep an eye on your pension from the start of your career. Piper Terrett reports
Stock market horror stories may seem a million miles away from the classroom. But headlines such as "Billions wiped off pension funds" will strike fear into the heart of anyone approaching retirement.
Teachers may think their nest eggs immune from the gut-wrenching falls of the stock market. But those topping up their pensions with additional voluntary contributions (AVCs) expose a portion of their retirement benefits to the market. Take the current turbulence as a wake-up call to overhaul retirement plans.
Ideally, teachers should start planning for their retirement when they have five to 10 years to go. A survey by stockbroker Comdirect revealed that a third of people over 60 wish they had begun retirement planning earlier. In spite of the stressful nature of the job, the life expectancy of teachers is high, so it is important to maximise benefits. A good starting point is to contact an independent financial advisor (IFA). Go to your union first as it is likely to have appointed a company to advise members.
Get up-to-date statements of your benefits from Teachers' Pensions, by post or via the website (www.teacherspensions.co.uk) for teachers over 54. Those in Northern Ireland should contact the Department of Education.
Those investing in AVCs should contact their provider for a statement. Many teachers invest in the in-house AVC scheme provided by Prudential, but the company hasn't had an easy time of it, what with September 11 and a battering on the stock market. However, teachers can select which funds they invest in according to their attitude to risk, and the Prudential scheme carries a lower charge (1 per cent per annum) than those of other providers. "AVCs are an unknown quantity," says Marion Bird, deputy head of pensions at the Association of Teachers and Lecturers. "You are dependent on the stock market, which can be good or bad, and currently it's not the best."
But Donna Bradshaw, IFA at Fiona Price and Partners, believes the problem is poor advice. "Not enough advice is given on fund allocation," she argues. "With investing in the stock market, it is the fund choice that is important. People don't like paying for advice but over the past few years a lot of people have lost more money than they would have if they'd paid for advice."
If the kitty looks bare, an alternative is to buy in "added years". Teachers can purchase any time period after the age of 20 which is not already pensionable as long as their total pensionable years are no more than 40. The cost is calculated according to your salary and age. "Virtually all teachers have additional years they can use," says Ms Bird. "Most don't start teaching until after 20 so they have a two or three-year gap. But if they leave it too late, it's going to hit their pocket hard."
Beware of paying too much into your pension. If you overfund you could end up paying 32 per cent income tax (or 48 per cent if you are a higher-rate tax payer) on the refund of your excess contributions. The taxman's limit is essentially that pension benefits by the time you reach 60 must not exceed two-thirds of your salary. If in doubt seek financial advice.
The stakeholder pension can also be used to enhance benefits. Any teacher earning less than pound;30,000 can contribute up to pound;3,600 a year to a stakeholder and receive tax relief. Pensioners will receive 25 per cent of the fund as a tax-free sum on retirement - which doesn't happen with the TPS or AVC - and the benefits are not included in the taxman's maximum.
Again the stakeholder's performance depends on stock market whims, and management fees are chargeable. But Ms Bradshaw is upbeat about the market recovering in the long term. "Now is a better time to be investing than last year," she says. "We lose sight of the fact that in the long-term the stock market will outperform deposit accounts."
Ensure you understand the element of financial risk you are taking on before splashing out. After 30-odd years of the three Rs, it can be a tempting thought to rest on your laurels and take a demotion. After all, you've worked hard all those years and deserve to put your feet up a little before they put you out to grass, right? Wrong! The teachers' pension is a final salary scheme, so a pay cut in your final few years could hit your pension hard. "Teachers should watch their pension position and not take steps in their career without thinking about it," warns Ms Bird. "Many of them decide they want an easier life and don't think about the consequences."
Once the piggy bank is in order, teachers should set aside an hour or two to think about how they're going to spend their hard-earned retirement. If you are unsure of how to fill your time , most unions run courses for members on the joys of retirement.
Piper Terrett is a financial journalist
* Don't delay retirement planning - the sooner you start, the better
* If in doubt, seek financial advice
* Keep your contributions up to date
* Buy in extra years if available
* Review your investment asset allocation regularly
* Don't over-fund your pension benefits
* Try to avoid taking a salary cut just before you are due to retire
* Get regular pension statements and keep informed - take responsibility
* Think of the lifestyle you want after retirement - how much money do you need to live on?
* Plan for dependants - make a will