Thinking of retiring early ahead of the new rules? Stop, and check these key points first writes Stephen Ingledew.
Many teachers and lecturers are still confused and angry about the Government's proposed changes to the early retirement regulations that are due to come into effect from April 1.
But anyone seriously considering quitting the profession over the next three months must carefully weigh up the practical financial consequences of such a decision. Teachers who are presented with the option of early retirement may therefore find the following checklist of key financial issues useful.
*Check pension entitlement
The pension benefits details you will be presented with if you opt for early retirement must be checked thoroughly as they form the basis of any financial decision you make.
If you have been making additional voluntary contributions, you should consider the options you have in respect of these funds, for example a level or escalating pension. Ask for comparison illustrations.
You may also find it useful to compare the benefits against those you would have received if you had retired at the normal retirement age of 60 in order to weigh up which course of action would be more advantageous in the long term.
The next step is to carry out a personal budgeting exercise. Compare your actual income and outgoings now while you are in employment against your estimated position if you opted for early retirement. This will give you an indication of whether you would be able to survive financially in retirement.
You may be surprised to see that the comparative position is not so bad because even though your pension will be less than your salary, your outgoings may also be lower.
As part of the personal budgeting exercise you should consider how your tax position will be affected. Tax does not go away just because you are retired. For example, how would the tax position in retirement affect your savings or any new investments you may make?
Do not forget to check any state benefit entitlement, particularly if income is going to be tight in retirement. Remember though that the state pension will not be received until you are 60 (for women) and 65 (for men).
However, it is useful to obtain a forecast from the Department of Social Security of what your state pension will be when you reach these ages. This can be done by completing and sending form BR19 to the DSS.
When considering the lump sum element of the pension entitlement you should bear in mind that you have still probably got another third of your life ahead of you. The average remaining life expectancy of a man and woman aged 50 is 24 and 29 years respectively.
Ask yourself whether you have any major planned expenditure coming up, such as home improvements or a new car. Or should the lump sum be used to repay part of your outstanding mortgage in part or full?
Alternatively, should the money be best invested in a range of savings products or even kept under the bed.
Remember that you may never receive such a capital sum again, unless you win the lottery, and if you do decide to invest it you should ask yourself: * Do I need an income from the investment or can I allow it to grow in value?
* How long should the money be invested for?
* How big a risk should be taken? No risk at all, or some risk to enjoy potentially higher returns?
* How much access to the money will be needed?
Remember, do not put all your eggs in one basket, and if an investment sounds too good to be true, it is.
* Family protection
When teachers retire early, financial protection for the family is often overlooked. On retirement you will no longer be entitled to a death-in-service payment. However, there is likely to be a widowwidower's pension for your dependants if you die before them.
It is important not to overlook how your changed financial position will affect the life you want to lead, particularly as you are likely to have more time on your hands for hobbies and interests.
Consider whether your estimated financial position would enable you to enjoy all those things you have been wanting to do but were too busy to start. There will be little point leaving teaching early if you find your financial position constrains you from being as active as you are now.
* Part-time work
If you are considering working part-time in retirement do take into account how such income would affect all the other financial issues outlined above. For example, on your tax position or on your decision where you invest any lump sum available.
EARLY RETIREMENT FINANCIAL CHECKLIST
* Have you checked your pension entitlements?
* Do you know what your income and outgoings will be?
* What will your tax position be?
* Will you be entitled to any state benefits?
* How will you use the lump sum? Repay mortgage, spend or invest?
* Will the family be fully protected in the event of premature death?
* Can you afford to enjoy your hobbies and interests?
* Would you like to do part-time work?
Stephen Ingledew is marketing director of Frizzell, a subsidiary of Liverpool Victoria.