Time to stop the gaps in your pension
An enterprising London college is currently promoting itself on the London Underground, with the slogan "You can't predict the future but you can prepare for it". Aside from admiring its relevance to education, I was reminded of the number of National Union of Teachers' members I have dealt with over the years who, for lack of knowledge, have left decisions on pensions and financial planning too late to get the best solution.
Despite certain shortcomings, the Teachers' Superannuation Scheme (TSS)remains a good occupational pension scheme. With rare exceptions all teachers should be in it. The net cost of the teachers' contribution of 6 per cent of salary is reduced by 25 or 40 per cent through tax relief and the employerGovernment contribute about another 13 per cent of salary. The pension is guaranteed, based on final salary and is inflation-proofed.
The changing patterns of employment generally are affecting teachers. Many more, therefore, have or will have gaps in their service which will reduce their pension. In addition, earning the full pension available at age 60 is now impossible. For most, employment as a teacher will not start until the age of 21-22 or older.
Gaps in teaching service can be plugged. Generally speaking, the younger a teacher is the cheaper that will be. Lost years can be bought under the scheme's past-added-years provisions which are based on an additional percentage contribution of salary. The cost can be spread over several years. Although the additional contribution percentage is lower, for example, for those in their thirties than those in their late twenties, the salaries when older will generally be higher and the cost accordingly greater. The equation is, of course, affected also by the level of tax paid. The maximum additional contribution that can be made with tax relief is 9 per cent of salary. A move at future ages from the 25 per cent to the 40 per cent tax band may reduce the net cost of buying-in added years. It is essential to get full information so that the decision can be made at the most advantageous time.
Remember also that buying-in past added years will improve the benefits you or your family receive if you die, or retire early because of ill health. Even if you have not completed the payments, the full number of years being bought in will be added to your or your dependants' benefits.
An alternative method of plugging gaps is through additional voluntary contributions (AVCs), which attract the same tax relief as past added years, but have different advantages and disadvantages. The TSS has its own AVC facility provided by the Prudential, and freestanding AVCs are available from a wide range of financial institutions, which will generally have higher charges than the TSS's one. The higher the charges the less of your contribution goes to your future benefits. The AVC route is more flexible than past added years, with greater freedom to vary the level of contributions and the nature of the benefits. Unlike those with past added years, however, AVC benefits are not guaranteed and depend on the investment performance of the AVC-provider.
A notable drawback of the TSS is the level of benefits for death in service or ill health retirement. This is particularly the case for younger teachers, but extends even to teachers in their fifties.
The family of a teacher who dies young will not get very much despite the best efforts of the teachers' associations to improve these benefits. Teachers are well advised to make additional provision.
This can be done at a modest cost in two main ways. In particular, life insurance can be provided through the AVC arrangement. This has the advantage of providing tax relief on the payments made and can be done in addition to using the AVC route to add to other pension benefits.
Alternatively, it can be provided through different types of insurance policies. The cheapest is term insurance, which is particularly relevant for younger teachers. As its title denotes, you can insure for a particular period of time. The pay-out, either by lump sum or as regular income for the rest of the term, is payable only if the teacher dies within that term. Teachers in their thirties and forties are better provided for under the superannuation scheme, but again, the benefits are far from adequate.
As teachers progress through the different stages of their career, their circumstances, needs and options will obviously change. This article cannot provide a complete guide; its purpose is to help teachers to provide for the future with particular reference to the superannuation scheme and the options within it.
A range of booklets is available from the Teachers' Pensions Agency on the superannuation scheme. Detailed information and advice on the TSS is available from teachers' organisations. Teachers should use it to help them make the right choices at the right time to protect them and their families. The teachers' organisations cannot, however, provide advice on insurance policies. That is not their role. What they can do is advise members of their entitlements and options under the superannuation scheme at any particular stage of their life. They can also help them to identify shortcomings and the most cost-effective solution.
The recent personal pensions fiasco is a timely reminder of the importance of using the expertise that is available from teachers' organisations.
Barry Fawcett is assistant secretary (salaries and superannuation) of the National Union of Teachers.