The cost of retirement
When you’re dreaming of life beyond the classroom, you may not be considering the potential costs of retirement.
Sometimes, the amount people receive in retirement can be very different to what they need to live comfortably and to achieve their goals.
To make sure you’re on track for a comfortable retirement, you’ll need to consider where your retirement fund is coming from and if possible, how much you’re likely to receive.
Sources of income
You may be part of the Teachers’ Pension Scheme, hold a personal pension, have savings, investments, property or stocks and shares. You’ll need to consider how you’ll access this money though - and bear in mind that you may not be able to get your money as quickly as you need.
For example, there may be rules around your pensions, savings and investments that could affect when you can access your pot.
As well as your income, you also need to consider your outgoings, as your expenditure is likely to change as you move through the different stages of your retirement.
The expenses of older age
Most people will see a dip in their outgoings in later life. You usually no longer make monthly pension contributions, your mortgage is likely to be paid off, and your children may have fled the nest, helping to reduce your household bills.
While this is great for your bank balance, you’ll also have more free time to do the things you love - meaning more money spent on holidays and taking up new hobbies.
As you get older, you may also need to consider the cost of care for yourself or your partner. It’s usually in these later stages of retirement that you may see an increase in your outgoings. However, with careful planning and consideration of these potential costs, you can enjoy a comfortable retirement.
To help you get a clear picture of your retirement income, and to make sure you have a retirement plan that matches your ambitions and lifestyle, Wesleyan Financial Services offers specialist retirement advice for teachers.
Considering your loved ones
There’s more than just yourself to consider when planning for retirement. With careful planning, your loved ones can also benefit from your pension and retirement income.
Joined-up planning
If you’re planning on spending your retirement with a spouse or partner, it makes sense to plan your retirement finances together. You may share a dream for retirement, but your benefit entitlements and minimum pension ages may be different. Getting a head start on your retirement planning will give you peace of mind for your future.
When you’re gone
Though it’s not nice to think about death, when you do pass away, will your loved ones be protected financially?
If you’re part of the Teachers’ Pension Scheme, your life partner is entitled to a pension in the event of your death, regardless of whether you die before or after retirement. The amount of pension they’ll receive depends on which scheme you’re a member of.
You can learn more about your death benefits in our short guide, What happens to my teachers’ pension when I die?
Who can receive a survivor’s pension?
- Your spouse or civil partner
- Your nominated partner (if you’re both financially interdependent when you die)
- Your children, if they’re either under 23 and in education, or incapacitated and financially dependent on you.
For the little ones
Are you the legal guardian of a grandchild under the age of 12? You may be able to claim extra National Insurance Credits to boost your State Pension.
You could also consider using any excess income or capital to help prepare them for their future, whether that’s by paying for school fees, topping up their piggy bank, or investing on their behalf. If you are considering passing on some of your wealth to younger members of your family, it’s important that you’re clear on inheritance tax rules too.
Please note the Financial Conduct Authority does not regulate inheritance tax planning and trusts.
Pensions and retirement income
Pensions are often an integral part of your retirement income. It’s important that you understand what’s included in your pension and when you can access your benefits, so you can adjust your retirement plans accordingly.
If you’re part of the Teachers’ Pension Scheme, you’ll be a member of either one or both arrangements; final salary or career average. The type of member you are will determine the type of benefits you’ll receive, how your pension is calculated, and when you can collect your pension. You can learn more about this in our guide to the Teachers’ Pension Scheme.
As well as the Teachers’ Pension Scheme, you may have a personal pension pot to give your retirement fund a boost. Up until April 2023, you may have also been impacted by the Lifetime Allowance - the total amount you could build up in all your pension plans over your lifetime without incurring an extra tax change.
However, in March 2023, the government announced that the Lifetime Allowance was to be abolished.
You can learn more about your pension options in our short guide to starting a pension.
Tax treatment depends on your individual circumstances and may be subject to change in the future.
Tax
If you want to make the most of your retirement income, you need to be aware of the possible costs of tax.
You need to consider tax implications when:
- Building for retirement (considering the annual allowance which builds up your pension funds and the tax efficiency of your savings and investments)
- Managing gifts (when cashing in or gifting valuable items or monetary gifts, consider capital gains tax and inheritance tax)
- Deciding how you’ll fund your lifestyle in retirement (your income after tax, tax-free lump sums from your pensions, inheritance tax, and money from your savings and investments)
Inflation
If you’re a member of the Teachers’ Pension Scheme, there’ll be ‘inflation proofing’ built in, which essentially means your pension will increase in line with inflation and won’t decrease in value when the cost of living rises.
If part of your retirement income is coming from savings or investments, an ideal scenario would mean that the interest you gain outperforms inflation. If it doesn’t, the value of your money will decrease over time, meaning you’ll be able to buy less with your money than you can now.
One way to potentially make your money work harder is through choosing investments over savings. However, this isn’t without its risks, so please seek advice before you commit to any investments. If you are interested in investing, you can read our quick guide to investments.
You’ll also need to consider inflation if you plan on travelling or living abroad during your retirement, as it can affect the cost of foreign travel and the cost of living in another country (depending on how the local economy performs).
Early retirement
Normal Pension Age in the Teachers' Pension Scheme is either 60 or 65, depending on which section of the scheme you’re in. However, you can take an early retirement from age 55 (proposed to rise to 57 by 2028).
If you also make National Insurance contributions, you’ll be entitled to a basic income from the government when you reach state pension age. You can’t take this any earlier, so if you do choose to retire early, you’ll have to wait to receive your benefits.
There are different rules for accessing different benefits, so check the details of whichever pension scheme you’re in. Regardless of which scheme you’re in, you’ll receive your pension in full at your Normal Pension Age, though you can retire and draw your pension as early as 55 to as late as 75.
If you do choose to retire early, your benefits will be reduced. How much is reduced depends on how early you take your benefits. You can learn more in our early retirement guide.
Phased retirement
If a traditional retirement doesn’t suit your lifestyle, you could consider a gradual move to retirement. To stay eligible for your benefits, you’ll have to either reduce your teaching hours or move to a less senior position. You’ll then have the option to take up to 75% of your pension, while you continue to work and grow your remaining pension as you contribute to the Teachers’ Pension Scheme.
Any pension that you take before your Normal Pension Age will normally be subject to reductions. However, if you take a flexible retirement after your normal retirement age, no reductions will be applied to your benefits.
For your application for phased retirement to be successful, you must have your employer’s permission, and your new salary must be at least 20% less than the previous twelve months averaged earnings. How phased retirement could work for you will depend on your individual membership, i.e. whether you’re a member of the final salary or career average arrangement.
To learn more about phased retirement under the TPS, read our comprehensive guide.
Your personal pension options
As well as having the option of choosing when you retire, there may be some flexibility on how you access your personal pension benefits. This does depend on the pensions you hold and your personal circumstances, and bear in mind that there are tax implications to consider.
Your pension options can include:
- 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.
If you need support understanding what's right for you, speak to Wesleyan Financial Services.