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.

For doctors there is no point in not taking your pension at 60 if you're in the 95 scheme as it doesn't grow any more and you're just losing money if you don't take it. I took my 95 and 15 scheme at 60. The 15 scheme was abated but still waiting for my McCloud calculations. I was 60 in 2023. A lot of people retire and return and continue to pay into the 15 scheme. But I don't know if the rules are the same for teachers

I'm sure you would find it helpful to join this Facebook group:
https://www.facebook.com/groups/teachertoteacher.tps/?ref=share

Thank you all, much appreciated! This has been really helpful.

There is some great advice on here, and you can join the FB sites that are for your pension particularly, and ask more questions there, but please be careful, there is a world of difference between general pension guidance and proper advice (which you have to pay for) because schemes are different and circumstances are different. You need to try and get a grip of what the options are. One thing I would be careful of, because it caught me out a bit, is the "Money Purchase Annual Allowance" thing. I retired at 57 with two pensions. A DB one (untouched, and irrelevant here) and a DC one. From the DC one, I took the lump sum, plus another 20k. I have since gone back to work for one year, but your annual allowance for any future savings into defined contribution pension schemes is reduced to £10,000 in the current and any future tax year. This is known as the ‘money purchase annual allowance’. Given I was only going to be there a year, in my head, I was going to slam some more money into the new pension scheme, then leave, taking the lump sum immediately, then draw down the rest, no dice, £10k limit. So although I will do the £10k with £2.5k tax free, that's all I can do. I only say this because I think another poster said take your pension, pay off your mortgage, and then if you get £30k redundancy, you could put it into your pension, I suspect you will not be able to if you have already drawn down. I am no expert, but just wanted to add what caught me out a bit. x

@weaselyeyes thank you for your update.

The good news is in 6 years you know you will get a full state pension of £11,973. (2025/26 rate).

Pensions are taxable but you don’t pay NI or pension contributions so you keep more of your income.

There are two calculators to help you. This is a mortgage overpayment calculator. https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

Gross to net calculator - use advanced options and state no NI.
https://www.moneysavingexpert.com/tax-calculator/

My advice is to pay as much off your mortgage as possible by overpaying. The overpayment calculator lets you play with increasing monthly repayments by just £10.

As you are in a final salary pension is there any way you can get a promotion/boost your teachers salary? All you need is one year of a higher salary and that will boost your pension and lump sum. The good news is they use your FTE salary if you go part time.

Really explore partial retirement as an option. Ask the pensions team for an estimate.Potentially dropping a day may make sense.

Also explore the redundancy options as it makes a difference if you are over NPA.If it’s offered ask for a quote and then you can crunch the numbers.

Sometimes you can only overpay 10% of mortgage so just look into the interest they would want if you paid off £60k

Out of curiosity what subject areas do you teach?

This is correct, however if you are remortgaging at the end of a deal you can make a capital repayment.

The Money Purchase Annual Allowance is only triggered by taking a DC pension, and only by taking income from it (not lump sum).

so you can take - lump sum + income from DB (you have to take them together with a DB, there’s generally no ability to take separately), and/or tax free lump sum but no additional income from DC, and not impact the annual allowance.

it is explained pretty well here https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa

so for this poster who could potentially start taking DB pension, it isn’t an issue

Be careful with pensions advisers as they tend to focus on private pensions, rather than having detailed knowledge of public sector and company schemes. Public sector schemes have had so many changes in recent years that they are far more complicated to understand than they used to be. My advice is to educate yourself in the details of your own circumstances and not rely on an outsider for accurate information. Read all the relevant documentation for your scheme and look at the example calculations. Also be aware of possible changes in taxation, lump sums may not always be tax free in future if the government changes the rules.

Thank you all, this has been so so helpful. I've done my best to be in an informed position but whatever I read or whomever I talk to, I quickly seem to go from yes, this is fine, I understand everything, to what the hell does that mean, and I get lost. Given my comprehension is usually good, I think this must be psychological! This has been really useful for giving me a better grasp of the basics. I'm not going to inherit any money so this is my last decade (probably) for actually being able to be active about my income, so I'm aware I need to stop sticking my head in the sand. I'm unlikely to get promotion as I'm at the top of my scale, so the only way up would be to go all out for very demanding roles, which I don't really feel I want to do as I want to try to remember what life is outside very consuming work and single parenthood.

I have been making modest overpayments on my mortgage, which I think should reduce the term by about 18 months if I keep them at this level, and I should be able to make bigger payments once my daughter's graduated (assuming I can hang on that long!). I'm on a fixed term mortgage for a further two and a half years, so that will be a good time to look at whether I need to pay more off or take a different kind of mortgage.

@BettyBardMacDonald I'm in HE and broadly my area is social policy/health, though my role is research and management focused.

The lump sum is tax free.

You can't afford to retire without doing the things you said you don't want to do.

If you downsize to a property worth approx £60k less than your current property you can pay off the mortgage in full with the lump sum and would be able to live quite comfortably with the pension plus a small amount of additional part-time work eg tutoring.

But moving incurs lots of costs such as stamp duty, estate agents costs and the moving itself. According to google the average cost of moving is £12k.

According to google it costs £290,000 to raise a child but millions of families do it for a lot less. £5k for moving house is perfectly doable and was factored in to what I wrote.

Yes @RatedDoingMagic and in lots of ways 61 is too late to expect to have a full range of options available, I'd need to have done a lot more advance planning to be in a stronger position. However, I'm pleased to be where I am. I ended up in a career I didn't think was possible for me, is unusual in my family, and when I became a single parent I prioritised security in the here and now for my daughter over better career progression. My only real asset is my house, which is tiny and would benefit from work doing on it, but is in an expensive area so has reasonable equity. If the worst came to the worst, I could simply downsize and move somewhere cheaper - which could be a good option in many ways, but could also be a loss in others. So there's lots to think about. I wanted to have a better idea of what was possible in my current position, whilst being at the same time aware that change will come whether I like it or not, either through ageing or because there'll be some new restructure that takes away my job etc.