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The Teachers Guide to Retirement Income Planning

The Teachers Guide to Retirement Income Planning

When it comes to planning your retirement income there's a lot to think about. It can seem difficult to know where to start and it's sensible to take professional advice.

But before you do, here are 7 factors you might like to consider before speaking to a Wesleyan Financial Consultant - they are specially trained to understand teachers' financial needs, including the Teachers Pension Scheme (TPS) and the Local Government Pension Scheme (LGPS).

This guide will help you to consider:

  • your income needs and how these are likely to change throughout your retirement
  • the implications of continuing to work past your normal retirement date (phased retirement)
  • what your retirement income streams will be and the importance of planning when to access them
  • when you can access your pensions
  • how to access your personal pensions flexibly
  • whether you will qualify for the full flat rate State Pension now that the TPS and LGPS are no longer 'contracted out'
  • how to protect your pension income from additional tax charges of up to 55%

1. Understand how much income you will need at different stages of your retirement

Unless you know how much income you will need, or would like, throughout the different stages of your retirement, it will be difficult to plan effectively.

On average, the teachers we surveyed in 2016 estimated they would need £22,467.02 per year to live on in retirement*.

Your monthly expenditure in retirement may look significantly different:

  • Usually, you will have stopped making monthly pension contributions
  • Your mortgage should be paid off, or monthly payments significantly reduced
  • Your children may have left home, helping to reduce your household bills
  • As you will have stopped working you will no longer need to pay for travel to and from work
  • You may want to work past you normal retirement date, or take phased retirement
  • You may spend more on holidays and leisure activities

 
Another important consideration is factoring in care costs that you may need to cover as you get older. However, recent research by the Citizens Advice Bureau revealed that of those who have accessed their pension since April 2015, only one in six had budgeted for care costs in later life.

When calculating your retirement income and expenditure you may also want to factor in making  'gifts out of income' to your children or grandchildren - to help towards paying school fees, mortgage deposits, and so on.

Points to discuss with your Financial Consultant

Talk to a Wesleyan Financial Consultant about:

  • what your personal expenditure throughout retirement might look like, and how this could differ from your current income and outgoings
  • whether you plan to return to work following retirement, and how this might affect your pension benefits.

 
2. Working past your normal retirement date (phased retirement)

As you approach your 'normal retirement age' you may wish to reduce your working hours, or take on a position with reduced responsibilities.

If your pensionable earnings have reduced by 20% over the previous six months as a result of this, you will be eligible to apply for 'phased retirement'. This means that you will be able to access your pension benefits whilst continuing to work. You will be able to access up to 75% of the benefits you have accrued.

How phased retirement could work for you will depend on your individual membership within the TPS, for example, whether you are a 'transition member' or a member of the final salary arrangement.

Points to discuss with your Financial Consultant

Talk to a Wesleyan Financial Consultant about the financial implications of continuing to work in early retirement, and whether you can continue to build up pension benefits in your occupational scheme.

3. The best time to access your retirement income streams

When planning your retirement it's important to think about all of the potential income streams you will need to access. As well as being members of their occupational pension scheme (41%), the teachers we surveyed* told us they were saving or investing in a number of other areas to help them fund their retirement:

  • Cash ISAs (41%)
  • Savings accounts (35%)
  • Personal pension plan (37%)
  • Property (18%)
  • Stocks and shares ISAs (13%)
  • Premium bonds (12%)
  • Stocks and shares (10%)


You will need to consider the best time to access these, for example:

  • you may not be able to get your money as quickly as you need it as some investments can't be cashed in instantly - property, for example, can take time to sell
  • you may not wish to sell shares until the market conditions are most favourable
  • there may be financial penalties for surrendering investments early


Points to discuss with your Financial Consultant

Talk to a Wesleyan Financial Consultant to plan access to your income streams at the time that will best suits your individual needs.

4. Understand when you can access your pensions

Pensions are front of mind for many when considering retirement income. But the age at which you can access your pensions depends on a number of factors and it's important to understand how your individual circumstances will affect this.

Accessing your personal or state pensions: The minimum pension age (the earliest you can take benefits from a personal pension plan or your state pension) is subject to change.

It is currently age 55 but the government has announced that they intend to raise this to age 57 in 2028, and then keep it ten years below the State Pension Age.

You will need to plan with this in mind. You can calculate your state pension age online.

Accessing your Local Government Pension Scheme benefits

Prior to 1 April 2014 normal pension age in the LGPS was 65. In the LGPS 2014 your normal pension age is the same as your state pension age.

Accessing your Teachers Pension Scheme benefits

Normal pension age in the Teachers Pension Scheme will differ depending on when you became a member and if you moved or will move to the new career average arrangement.


If you joined the TPS:

  • before 1 January 2007, your normal pension age is 60
  • on or after 1 January 2007, your normal pension age is 65
  • after 1 April 2015, your normal pension age will be linked to your state pension age


If you moved to the career average arrangement then the benefits you accrued before you moved will maintain the normal pension age above. Any the new benefits will have a normal pension age linked to your state pension age.

You may have benefits in more than one TPS arrangement. If this is the case it is sensible to speak to a specialist to understand exactly which benefits you will be able to access and when.

If you were a member of the TPS before 1 January 2007 and had a break in service of more than five years (and returned to work after 1 January 2007) your normal pension age will be 60 up until the end of your break. For any future service your normal pension age will be 65.

Points to discuss with your Financial Consultant

Ask your Wesleyan Financial Consultant to help you understand how your individual circumstances affect when you will be able to access your pensions.

5. Understand the 2015 pension flexibilities

70% of teachers we asked were unaware that of the ability to take the whole of any defined contribution pension as a cash lump sum (currently from the age of 55) - regardless of whether they have retired or not.

Points to discuss with your Financial Consultant

Discuss the 2015 pension flexibilities with your Wesleyan Financial Consultant and start thinking about which option(s) might be best for you:

  • Leaving your pension pot untouched
  • Using your pension to buy a guaranteed income for life (annuity)
  • Using your pension to provide a flexible retirement income (flexi-access drawdown)
  • Taking your pension pot as cash
  • Taking your pension as several lump sums
  • Mixing your options


6. Your entitlement to the flat rate State Pension

Until April 2016 the TPS and LGPS automatically contracted members out of the Additional State Pension - allowing both employer and employee to pay lower national insurance contributions (NICs). The State Pension and Additional State Pension have now been replaced by the new flat rate State Pension.

Only those with 35 years qualifying NICs will be entitled to the full flat rate pension (currently £155.65 per week). Individuals who have been 'contracted out' will have this taken into account when entitlement is calculated. You will need to make sure you know whether you qualify so that you can make accurate calculations about your retirement income.

If you are unsure as to whether you will have enough qualifying years you can check your National Insurance record to see if there are any gaps. You may then be able to apply for credits to fill these gaps.

In addition to applying for credits, you may be able to make voluntary contributions to fill gaps in your national insurance record (if you are eligible), and find out how much it will cost you to do this.

A single year of NICs contribution can be purchased as a lump sum for around £733 which could boost a pension pot by around £230 a year. This could generate £4,600 over 20-years. So, someone purchasing an additional five years contributions could benefit from an extra £23,000 for a contribution of less than £4,000.

Points to discuss with your Financial Consultant

Talk to your Wesleyan Financial Consultant about what your retirement income from the State Pension is likely to be, and how to make up any shortfalls in your NICs record.

7. Protecting your Lifetime Allowance

92% of teachers we surveyed in February 2016 could not correctly identify the Standard Lifetime Allowance (LTA)*.

This is the total amount you can build up in all your pension plans over your lifetime without incurring a tax charge. On 6 April 2016 the LTA was reduced from £1.25 million to £1 million.

If the total value of your pensions exceeds the LTA when you take benefits you will incur a tax charge on the excess - reducing your retirement income.

To allow you to protect existing pension saving you have against the reduction in the LTA, HM Revenue and Customs (HMRC) introduced two new forms of LTA protection in April 2016:

  • Individual Protection 2016 (IP16) - which gives you a personal LTA equal to the lower of a) the value of your benefits at 5 April 2016 or b) £1.25 million
  • Fixed Protection 2016 (FP16) - which gives you a personal LTA of £1.25 million


The LTA was also reduced from £1.5 million to £1.25 million on 6 April 2014.

Those impacted by this reduction can apply for Individual Protection 14 (IP14) which protects an individual's LTA equal to the value of their pension savings on 5 April 2014, subject to an overall maximum of £1.5 million. Applications for IP14 can still be made.

Points to discuss with your Financial Consultant

Talk to your Wesleyan Financial Consultant about applying for protection to avoid paying unnecessary tax on your pension income.

Key takeaways

  • The amount of income you need is likely to vary throughout your retirement
  • The financial implications of continuing to work past your normal retirement date (phased retirement) will depend on your membership arrangement within the TPS
  • You will need to consider the best time to access your retirement income streams
  • The age at which you can access your retirement income varies depending pension scheme rules, and is subject to change
  • The Pension flexibilities introduced in 2015 give greater flexibility around how pensions are accessed and there are several possibilities for you to explore
  • Only those with enough 'qualifying years' NICs will be entitled to the new flat rate State Pension
  • The total value of your pension benefits at retirement may be subject to additional tax charges if they exceed the lifetime allowance (LTA), unless protections are put in place now

We are holding a number of financial planning seminar throughout the UK, designed specifically for education professionals approaching or considering retirement (aged 50-64). Reserve a place at your nearest seminar today at:  https://wesleyan.eventbrite.co.uk.

Alternatively, to arrange an appointment with your local Wesleyan Financial Consultant simply email financialreview@wesleyan.co.uk  or call 0800 980 4357 quoting reference 61154. They are specially trained to understand the financial needs of teachers and will be happy to speak, under no obligation, at a time that suits you.

* Research based on a survey of 613 professionals (100 dentists, 203 GPs/Hospital Doctors, 100 lawyers and 210 teachers) by Censuswide on behalf of Wesleyan, February 2016.

This guide does not constitute financial advice.

This information is based on our current understanding of legislation. Legislation and tax treatment can change in the future.

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