Window on a new world
David Gray isn't planning to take things easy when he retires from teaching at Christmas. He'll be spending his final summer holiday as head of Babbacombe primary school in Torquay learning how to drive a heavy goods vehicle and hopes to land a new job as a lorry driver early next year.
Mr Gray will be 58-and-a-half years old when he makes this unusual career move, which means his pension will be lower than it would be if he stayed on in his current job until 60. But after 38 years in teaching, 22 of them at Babbacombe primary, he feels it's time for a change. "My pension will be around 9 to 10 per cent less than I'd get if I stayed on," he says. "But my wife and I took that into account and decided that the pension we were going to get would be sufficient."
A growing number of teachers who want to leave the profession early are making similar calculations and settling for reduced pensions. In 200001, when the Government introduced "actuarially reduced" pensions for members of the Teachers' Pensions Scheme, just 861 took up this option. But the numbers have been rising steadily since then, from 2,113 in 200102 to 3,174 in 20023 and 4,189 in 200304. These figures reflect a corresponding decline in the use of more generous premature retirement arrangements where a teacher can be credited with extra years of service as compensation for leaving early.
In 1997, individual employers, rather than the pension scheme itself, took over responsibility for premature retirements and proved less willing to shell out. Teachers can take actuarially reduced pensions at any age between 55 and 59 and 11 months. The younger they are at the time, the bigger the cut in their pension benefits.
"The reduction peaks at 55 and zero months when an individual will lose 25.8 per cent of their pension and 15.7 per cent of their lump sum," says Mike Beard, assistant secretary for salaries, pensions and conditions of service at the National Association of Head Teachers.
"This is basically a penalty for collecting the pension early, so the penalty for picking it up five years early is obviously harsher than for somebody who picks it say at 58-and-a-half, when the reduction has decreased to 8.8 per cent of the pension and 5 per cent of the lump sum...
And any reduction is like a puppy. It's for life."
There is nothing to stop someone on an actuarially reduced pension taking another full or part-time teaching job and rejoining the pension scheme to build up further benefits. That will have no effect on his or her existing pension. By contrast, people returning to teaching after taking early retirement are not allowed to earn more in any financial year than the difference between their pension and their previous salary.
Even when premature retirement is not on offer, teachers wanting to leave the profession between the ages of 55 and 60 don't have to take an actuarially reduced pension. They can leave their pension untouched until they reach 60 and then take the benefits they had built up previously without paying a penalty.
And from next year, new Inland Revenue rules will improve opportunities for flexible retirement. Instead of the current "take it all or take nothing" situation, teachers will be able to take a reduced portion of their pensions benefits early, and leave the rest in the scheme to pay out, unpenalised, at a later stage.
This also applies to people who leave before the age of 55 and never go back into teaching. Former history teacher Sue Jones, for instance, quit teaching in 1999 when she was 46. Now working as a freelance writer and paying into a private stakeholder pension plan, she'll get a teachers'
pension based on 180th of her salary for each of her 24 years of service, plus a lump sum of three times that pension once she reaches 60. Even though these benefits will have gone up in line with inflation since 1999, they will obviously not add up to as much as she would have been entitled to had she stayed in the Teachers' Pensions Scheme.
But Ms Jones has no complaints. "What you get out is related to what you pay in to the pension scheme," she says. "There is an element of index linking, which is helpful, and bearing in mind what's been happening to some other people's pensions, teachers are in a pretty favourable position."
The important thing for people in her position, she says, is not to forget about their pension, but to work out what it will be worth, how much they will need when they retire and how to make up any shortfall.