Please help me understand the basics of my pension

[weaselyeyes]

In theory I'm a reasonably intelligent person, but I have a complete mental block in relation to pensions and retirement planning. This is unfortunate, as I'm 61! I'm hoping someone sensible can give me some pointers.

I'm in the teacher's pension scheme, and come into the transitional category - so mostly final salary although a portion will be career average. I realise there's been a ruling/recalculation on that, although I'm not really sure of the implications. Anyway, the last time I was able to get a benefits statement, I think I was due approx £60k as a lump sum plus £21k pension if I retired now and would get another small amount at 67 when I get state pension.

I would love to retire now and am hugely restless, but I have a mortgage until I'm 70 (£117k outstanding, approx £1350 per month). Although I'm overpaying a little, I am a single parent with quite a lot of outgoings and my daughter's at uni, so I can't afford to stop work now.

Like anyone, there's lots more detail and context, and I don't know what my daughter will do post-uni, so lots of unknowns, but in essence I'm wondering:

• when I retire, do I have to pay tax on the lump sum? As a higher tax payer, would that mean I paid £24k tax so got a lump sum of £36k?
• Should I be trying to take parts of the lump sum over time in order to minimise tax or does it not make any difference? Is this even possible and what does it mean for my eventual pension?
• I currently work 4 days a week on compressed hours. A pension adviser I spoke to (without being able to understand much of what was said due to mental block!) said I'd be no worse off if I worked a day less a week due to partial retirement. Does taking partial retirement have an impact on lump sum or future pension levels?
• Although my workplace isn't doing redundancies at the moment, it's highly likely they'll come round in the next year or two. As I've been there a long time I might get a reasonable settlement, which would be reduced if I reduced my hours. But would this matter if I pay tax on it?

I know there are lots of other things I could do - downsize, take a job elsewhere, etc, but assuming I didn't do any of those things, I'd like a better grasp of what lies ahead. I feel really stupid that I have such a poor grasp of the essentials.

I'm in the teacher's pension and a transitional member like you, although no longer teaching. We are now subject to the McLeod remedy ( Google it!) which basically means when you apply for your pension you will be offered a choice of taking all your pension in the final salary scheme or keeping your final salary and career average pensions. You should be able to see this when you log in to your account. I intend to take mine next year at 59. Your lump sum is tax free.

The lump sum is not taxed it is 3 times your annual pension, though your pension will be taxed as income . 21k is about 1730 a month, so paying your mortgage and living off 1750 doesn't seem possible I do not know what other savings you have. Many people use the lump sum to reduce mortgage. I don't know when your current fix runs out some companies limit overpayment to 10,%oc balance ie 11700 per year.
60k in best savings account which is currently about 4.8%interest will yield approx 240 per month before tax.
You could retire reduce mortgage by remortgaging for lower sum of 57k using your lump sum units entirety then find part time job to rebuild savings until 67,
Do have sufficient years NI to get full state pension ( though it will be taxed as you have already used tax allowance on teacher pension)

The ruling about pension is the Mcleod ruling and it will apply, if when you joined the teacher pension scheme the normal retirement age for female teacher was 60 you will get pension without reduction as you are over 60, but is index linked so that doesn't much matter. I recently took early retirement from NHS which works in a similar way

You can't pay your mortgage out of 1750 a month as it only leaves 400 for all bills utilities food etc but 1750 would be ample for 1 person if no mortgage. So look at savings to see how much you could reduce mortgage to a mortgage of 57k would've less than half what you currently pay and that would be doable just on your pension

There is an excellent Facebook group Teacher to Teacher pensions where all your questions can be answered.
In a nutshell, your lump sum is tax free. You cannot draw down parts of your lump sum. Is there a reason why you haven’t already claimed your pension assuming your NPA is 60?

This guy David Fountain has great advice about teachers pensions https://youtube.com/playlist?list=PLie2zLiEOtFkpQnLbae-zh-gBxJnSDxWa&si=EQIu-Gebgzb0h6rK

Thank you for your responses! Unfortunately googling makes little difference with my poor level of pension comprehension. The website told me I would be affected by the pension ruling, but I didn't really grasp the implications of any of the supporting documentation or whether I'd be worse or better off either way.

It's good to know the lump sum isn't taxable and thank you for clarifying that I can't take it in instalments. I haven't retired at 60 because can't afford to, given my mortgage payments and the need to support my daughter. I don't really have anything in the way of savings, but I appreciate I could remortgage and use lump sum to reduce payments.

Thanks for links also. I can't really explain why I'm so stupid about this. It must be denial of mortality or something. I suppose my last decade or so has been dominated by not wanting to lose my job as everything fell on me as a single parent and there weren't many employment alternatives in my region without a long commute or moving and I didn't want to uproot my daughter. Now I'm realising my job will end one way or another and I'm not very well prepared. I'm trying to grasp what the default position is so I can decide around it.

If you took the pension now and put the lump sum of £60k towards your mortgage , can you see what that does to the payments?

On the redundancy side, yes if you work less hours it will impact your amount, but it's still worth doing if you're struggling to do your existing hours. With any redundancy package the first £30k is tax free and you can put the rest into your pension again tax free ( there are maximum amounts but you can use any unused previous years allowance).

If I were you and you genuinely think redundancy is likely in the next couple of years I would try to stick it out, but reduce your hours anyway for your own wellbeing.

If you used 50k of your lump sum towards mortgage the balance would be 67000 over 9 years till you are 70 that is 756 a month. giving you approx 1000 a month for everything else it would also give you an emergency savings fund of about 10,000. You could see if you can manage for the next 3 months on 1000 . Then you will know whether 6 years at 1000 per month is feasible as at 67 you will have your state pension kick in. WeAlso how old is your daughter still in school working studying?

@rookiemere thank you, that's helpful to think about. I think if I remortgaged the remainder after the lump sum, it would bring it down to just under £600 a month which is more manageable, though I'm really aware that that would be a tight income and no savings. (Or I could do 50K as you suggest @Cottagecheeseisnotcheese)

I think I definitely have to stick it out for a while, at least until I know what my daughter's doing post-uni (currently in second year). There's obviously lots of unknowns, like redundancy, health etc. Now I'm on my own with my daughter away, it feels like the first time I've had space to think, and I'm weighing up wanting to make the best financial decisions (for me, but also my daughter) with being aware that though I'm in reasonable health now, I can't take this for granted. I don't want to finally retire at 70 and not have any time to find out what adult life is like outside of working. Since I turned 18, I've only had six weeks out of work for maternity leave.

In about five years or so the mortgage should be small enough that you can pay it off in full with the lump sum.

If your daughter does decide to move back home after uni once she is working it would be reasonable for her to contribute to bills and food and your loss of single person council tax deduction not so you are profiting from her but neither are you subsiding her, she will still be gaining as no "rent" element

when retire, do I have to pay tax on the lump sum? As a higher tax payer, would that mean I paid £24k tax so got a lump sum of £36k?
Currently the lump sum is tax free. No one can predict if this will change.

Should I be trying to take parts of the lump sum over time in order to minimise tax or does it not make any difference? Is this even possible and what does it mean for my eventual pension?
At present the only way you can take a part lump sum is if you do partial retirement. It will not make a difference to tax.
If you take any pension before normal pension age it will be actuarily reduced I.e. you will get less because you are taking it for longer.

I currently work 4 days a week on compressed hours. A pension adviser I spoke to (without being able to understand much of what was said due to mental block!) said I'd be no worse off if I worked a day less a week due to partial retirement. Does taking partial retirement have an impact on lump sum or future pension levels?
If you partially retire before normal pension age your lump sum and pension are actuarily reduced because you will receive the pension for longer.

Although my workplace isn't doing redundancies at the moment, it's highly likely they'll come round in the next year or two. As I've been there a long time I might get a reasonable settlement, which would be reduced if I reduced my hours. But would this matter if I pay tax on it?
This question doesn’t make sense. You would pay tax based on your entitlement. You need to check the current redundancy offerings.

I appreciate you have a mental block. What you need to do is break it down and look at each issue separately. Take each bullet point below and do the first one before you move onto the next. Do not try to do them all in one go, do one a week.

• State pension - Action: do a pension forecast https://www.gov.uk/check-state-pension State pensions changed in 2016 and you need to understand how this impacts you.
• Normal Pension Age (NPA); - For your State Pension and Career Average Pension this is currently 67. For your teachers final salary pension this is either 60 or 65. If you were in the pension scheme prior to 01/01/2007 and have been in continuously your NPA is 60.
• Action: Log into your pension account https://www.teacherspensions.co.uk/public/login.aspx this should tell you your NPA. This is crucial to understanding when you can take your full pension.
• Annual pension statement - Action: you must have received one in 2024. If not you should be able to view it on your pension account. This should show your pension on the basis of being in the final salary scheme until 31/03/2022.
• Actuarial reduction - this is if you take your pension before your NPA. Until you know your NPA you don’t know if this affects you. Essentially they deduct a % for each year you take your pension early.
• McCloud Remedy: To put it simply in 2015 the government fucked up when they tried to change from final salary to career average pension schemes. https://www.teacherspensions.co.uk/members/scheme-changes/transitional-protection.aspx
• From 1 April 2022 your pension will be career average and the NPA is currently 67. If you take this before age 67 it will be reduced.
• Pension prior to 31/03/2015 this can be taken in full at 60 or 65 depending on your NPA. You will know this if you did the steps above.
• Pension between 01/04/2015 and 31/03/2022 you will be given a choice whether want these years to be in the career average or final salary pension schemes. You will get full details of the choice you are being asked to take.

If your NPA for the final salary is age 60 then taking partial retirement is definitely an option because you would not be subject to actuarial reduction. You could ask your pension scheme for an estimate. https://www.teacherspensions.co.uk/members/planning-retirement/types-of-retirement/phased-retirement.aspx

I know this post contains a lot of detail but as I have said do one step at a time.

Yes, I think she'd be happy to do that @Cottagecheeseisnotcheese , which would help. Of course, she may go and live somewhere else entirely, which would prompt another set of decisions, or do a masters 😬which might mean continued expenditure. I'm very grateful for everyone's responses, which have made me feel that I have a least a few options. I kept thinking of having to cling onto work grimly for nine years without a hope of reprieve. Obviously we always have at least some options, but my stupidity about pensions wasn't helping me think them through.

You can go down to 3 days and take your teachers pension. You would be best to contribute to TP in new 3 day a week job.

You will therefore be getting a lot more income each month - pay off as much of your mortgage as you can, or save to pay off when mortgage deal ends.

Lump sum not taxed unless it's more than the max 25% allowed.

Yes, being on less days would affect any redundancy payment.

Your union should be able to direct you to a company for a personal discussion.

You can take your pension at 60 and continue to work. If you continued in pensionable teaching your pension would be subject to abatement, but if you worked in a different job out of education, you get to keep your full pension plus your new salary.

Does the 85 year rule apply? I’m in LGPS(local Gov) and if your age now plus number of years in workplace = 85 then you can go on full pension, might be worth looking into as the final years at work can make a big difference

I’m not sure what else I could do outside my field - I feel I’m too old to be an appealing prospect in a new area! I’d thought of trying to get a different job, but wondered if I ended up on a much lower salary I’d just end up in the same place financially. I can do a bit of consultancy, but there’s not much around at present so I’d rather see it as an extra than something to be relied upon.

@ByQuaintAzureWasp by go down to 3 days, do you mean take partial retirement?

@Thameslock I have no idea really, but I don’t think so. I’m not really sure what full pension means - there’s just a calculator that shows different amounts you can receive at different ages

“Full pension” being what you would get a normal retirement age(67?)

Excellent post. OP if you take the advice in this post and work through the steps one by one you will get much more clarity.

Thank you for your detailed reply @Harassedevictee - I’d missed it upthread. My final salary pension age is 60 and career average element kicks in at 67. I’ll get a full state pension. I’ve been able to access teacher’s pension statements until recently but they’re not working on the website at present for people in my situation - presumably as they need to do some recalculation. Just seeing the word ‘actuarial’ induces a kind of brain freeze, but I think I get your point! It would not apply to the final salary element. Maybe when I can see a statement again I’ll be able to understand the final salary/career average choice bit.

Re redundancy, there aren’t any offers on the table at present, they just come round regularly every three years or so and given the state of my sector they’re likely to loom at some point. They’ve varied hugely in the past from voluntary and generous to compulsory and basic, so I have no idea what/when I might be eligible for - if anything even does come along. I suppose I’m just very aware that I’m getting near the end of my time to be able to earn a reasonable salary - which would be relief in lots of ways - and the only chance I have of getting any significant financial injection will be the pension and hypothetically redundancy, so I don’t want to mess up.

Hi OP, I retired early at 57 but didn't take my Teachers Pension until I was 60. If you think you need to work another couple of years until your DD graduates you can prepare now. In the year before I retired I made sure all of my appliances were newish, I got a few jobs done in my home while I was still earning more. Your lump sum is tax free. When you take your pension you will be better off taking all of it as the final salary provided you don't cut back your hours and still work full time equivalent. Once you get your pension it's inflation proof. That means if inflation jumps up your pension will increase. Whilst it would be very good to pay down your mortgage make sure there is no penalty for doing so. Some mortgage lenders only allow 10 percent overpayment in any year. If you get £60k lump sum I'd keep £10k back for savings and emergencies. Pay £50k off your mortgage. I don't know what type of mortgage you are on but sometimes it's worth buying yourself out of an expensive fix if BoE drop the rates a couple more times.

You can ask for a state pension forecast. It's based upon past NIC contributions.

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