Mind the gap

3rd June 2005 at 01:00
Worried that your pension will not be enough? Sue Ward checks out how to set aside more money for your retirement

From next year, most teachers will be able to put more money aside for their retirement and still get tax relief. The rules about what you can buy will also become more flexible. There are several options available, though comparing them is not easy.

Currently, the Inland Revenue has rules about how much you can put into your pension scheme in any one year, and what you can have as pension. You can get tax relief on pensions contributions of up to 15 per cent of your earnings in a year. Since most teachers pay the standard 6 per cent of their salary into the Teachers' Pensions Scheme, that leaves 9 per cent available for extra payments. Bear in mind that when you retire the most you are allowed as pension is two-thirds of your final salary.

From next April, that changes. You will be able to put in up to 100 per cent of your salary in any one year, with full tax relief. At retirement, all non-state pensions will be added together and their capital value calculated. Only if they are worth more than pound;1.5 million - enough to give a pension of around pound;75,000 a year - will you pay tax of 55 per cent on the extra fund.

The traditional way for teachers to build up extra pension, if they have gaps in their service, is to buy past added years (PAYs). This gets you extra pension for yourself, extra pension for your spouse and possibly also extra ill-health pension. Once the pension starts being paid, you also get increases to take account of inflation. You can pay for added years by extra deductions from your salary each month for a period (called Method A), or in a lump sum (called Method B) during your working life or at retirement. The costs vary with age, and for Method A also with the length of the contract you sign (see right).

There is also a rather special provision in the TPS called current added years (CAYs). If you are not paying into another employer's pension scheme you can continue after leaving teaching as a member of the TPS, paying both your own and your employer's contributions, for up to three years, or six years if you are teaching abroad.

Alternatively, you can buy extra pension linked to investment returns - basically through investing your money in the stock market. This is done by paying additional voluntary contributions (AVCs) to the Prudential, which has been chosen by the TPS to manage teachers' AVCs. Or you can sign up with another provider to pay what are called free-standing AVCs (FSAVCs).

A third possibility is to pay into a personal or stakeholder pension scheme; you can put up to pound;3,600 a year into one of these at the same time as belonging to the TPS (on top of your 15 per cent allowance within the TPS), so long as you are not earning more than pound;30,000 a year.

In all these arrangements you pick your investment, usually from a range of funds invested in different parts of the stock market. By the time you come to retire, there is a "pot" of money with your name on it. That then buys you a pension for as long as you live (called an "annuity", see below).

You can decide whether to buy a spouse's pension, what sort of annual increases you want, and so on. At present, it is only possible to draw a lump sum from these pension investments in a few cases, but that changes in 2006 and you will be able to have up to 25 per cent of the fund as tax-free cash. It will also be possible to mix and match different pension arrangements far more than you can now.

However, both the Department for Education and Skills and the Prudential are reviewing what they offer in the light of the tax changes.

Sue Ward is an independent pensions expert and author


Bill and Angie are full-time teachers in their 40s. They recently inherited some money, which they have put away in short-term investments. Bill only started teaching when he was 30, while Angie began at 23 but took several years off to bring up their children (now both grown-up).

They know that Angie is likely to outlive Bill because women's life expectancy is longer. They decide that they want to increase the amount of secure income they have in retirement, but can afford to take a bit of a risk for the chance of a good investment return.

Bill signs up for past added years, buying as much pension as he can with the 9 per cent extra contribution he is allowed to make this year, under Method A. Next year, when the tax rules change, he plans to investigate using some of their savings to pay a lump sum under Method B.

Angie puts 9 per cent of her earnings into teachers' AVCs, signing up for a balanced choice of investments that she feels carries some risk. She'll review this next year.


When you think about buying an extra pension, look at your financial position as a whole and consider what's suitable for you as well as spreading the risk by not having all your eggs in one basket.

Trying to compare the different packages is like comparing apples and pears. The security and inflation-proofing of added years makes them quite expensive. At age 35, one added year could cost about 17 per cent of annual salary, rising to about 24 per cent at age 59. However, spouses' and dependants' pensions do come as part of the package.

AVCs or personalstakeholder pensions give you more choice about investments, and at retirement you can decide what package to take, but the final result will depend on how the investment market has done over the years and, of course, this can go up or down. The cost of buying an annuity can change rapidly also. You need to do your homework.

The information on added years and AVCs is all on the TPS website, and you can find information about personal and stakeholder pensions elsewhere.

Read it carefully, including the small print and conditions, before signing up to anything, and then review your position regularly.

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