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Phased retirement allows members of the Teachers pension scheme who may be thinking of going part time, reducing their hours or just reducing their responsibilities and then being able to to substitute this loss of income with their pension benefits from the Teachers Pension.
Who is eligible for Phased Retirement from Teachers Pension
To be eligible and qualify for phased retirement from the Teachers Pension you need the following;
- You need to be over the minimum pension age which is 55 for the final salary schemes and is rising to 57 in 2028 for the career average scheme.
- You also need to have been a member of the pension scheme for the past two years to qualify for a pension
- Finally, you need to see a reduction in your salary of at least 20% for at least 12 months.
Can I take phased retirement from both final salary and career average schemes?
If you are a member of the final salary scheme and also an active member of the career average scheme, you don’t have to take the benefits from both schemes. It’s possible to take one and not the other. This can be a useful thing because if you take the career average benefits early, you can incur quite serious actuarial reductions as we’ll come on to later.
Phased Retirement from Final Salary Pension Scheme
Let’s take John who has built up 20 years in the Teachers Pension Final Salary scheme with a normal pension age of 60 and he is currently aged 57 and about to take phased retirement. Let’s assume his final salary number is £25,000 at this time. To recall the formular for calculating these benefits we take John’s final salary and multiply this by his years of service and divide this by 80. Plugging his numbers in, this means his pension is worth £6,250 per annum (20/80 x £25,000).
Let’s assume that John is going to take the maximum amount of pension that he can take using phased retirement – which is 75% of his pension.
In this case, 75% of the 20 years of service he has accrued means the most he can take under phased retirement is 15 years, which we then use to calculate what the first phase of his pension will be.
To calculate the pension he will be entitled to we take 15/80 and multiply this by his final salary at the time of £25,000. This means the pension he will be entitled to is £4,687 per annum.
However, as John is taking his pension before his normal pension age, an early retirement penalty must be applied. For a 57 year old, the early retirement factor will be 0.880. To calculate his actuarily reduced pension benefit, we take his accrued pension of £4687 and multiply this by 0.880. This means his actual pension will be £4,124 per annum.
Don’t forget that John will also be entitled to an automatic lump sum with this scheme which is three x his pension. This works out at around £12,373.
What happens in three years when John is now age 60 and comes to take the remaining benefits he has built up in the final salary scheme? How about if his salary is now £30,000.
To calculate the 2nd phase of his pension benefits we take £30k and multiply it by the remaining 15 years of service and divide by 80. This means his second phased retirement benefits will be a pension of £1,875 per year and a tax free lump sum of £5,625.
Putting this together and ignoring any inflationary rises in the first phase annual pension for simplicity, this means John’s pension benefits will now be an annual pension of £5,999 and he should have received £17,997 tax free lump sum over the two phases of retirement.
How does Phased Retirement Work for The Career Average Scheme?
Let’s assume that Felicity is also aged 57 and considering phased retirement with her career average benefits that to date, are worth £10,000 per year. Her normal pension age is 67.
If she was to take 40% of her pension benefits this would result in a pension of £4,000 per year. However, as she is taking her pension benefits 10 years before her normal pension age of 67, this means her pension will be actuarily reduced and the early retirement factor of 0.61 will be applied which means the actual pension she will receive will be £2,440 per annum. She can still take the remaining £6,000 pension at a later date.
As she is still working and an active member of the teachers pension scheme, and her pensionable salary is £30,000, under the career average rules she will also increase her pension by around £526 per annum (1/57th x £30,000).
Let’s assume she works for another 5 years and we will ignore inflationary increases to make it easy, she would accrue a further £2,630 annual pension, she would be entitled to the original remaining pension of £6,000 per year and finally also the pension that she took as part of her phased retirement at age 57 which comes to 2,430 per annum. In total, this would come to £11,060.
| Pension Takern at 57 | Pension Further Accrual 5 Year | Remaining Pension From 57 |
| £2,440 per annum | £2,630 per annum (£526 pa x 5 years) | £6,000 per annum |
What Effect Does Early Retirement Have
How about if John hadn’t taken phased retirement from 57 and instead had just taken his pension benefits from the final salary scheme at his normal pension age of 60?
Let’s assume his salary was £30,000 again when he went to take his pension and he also had the 20 years of service.
We take his final salary of £30,000 and multiply this by 20 and divide by 80.
This means John had he not taken phased retirement would have been entitled to a pension of £7,500 and a lump sum of £22,500, which is significantly higher than his pension benefits from taking phased retirement.
This really does highlight the risk of phased retirement – one that you can incur early retirement penalties if you take benefits before the normal pension age and secondly that if your final salary increases this can lead to a higher pension amount.
How The Timing of Your Phased Retirement Effects Your Final Salary Benefits
If you have any final salary benefits and you decide to take these under phased retirement, then your pension for the first phase of phased retirement will be based on your final salary at the time you elect for phased retirement.
Let’s say you take 50% of your final salary pension during your first phased retirement and your salary was £30,000, then when calculating your pension will be based on this amount.
If you were in the career average scheme when you came to fully retire and take the remaining pension from your final salary scheme, then when it comes to calculating your remaining final salary pension benefits the salaries earnt in career average will be used.
Let’s assume your salary is £35,000, then when you come to take the remaining 50% of the pension, these benefits will be based on the higher salary of £35,000.
How many times can I take phased retirement
If you have final salary benefits, you can take a maximum of two phased retirements before you fully retire. If you have career average benefits, then you can take a maximum of three, but only two can be taken before age 60.
If you have both career average and final salary benefits, you can take different proportions from both sections.
How is My Final Salary Calculated?
When it comes to calculating what your final salary was for your final salary benefits, its not as simple as using your final salary when you retire. It is calculated using the better of:
The average of your best consecutive three years salaries in the past ten years or;
Your last pensionable pay in the previous 12 months.
It does this to protect against the scenario where someone may reduce their hours in their final years which could significantly reduce the pension benefits.
What is Abatement
If you have reached normal pension age and have opted out of contributing towards your pension, you can take your pension however, your final salary benefits will be subject to abatement.
Abatement is essentially when you remain in employment, but you also take your Teachers Pension. If your combined earnings exceed your salary of reference, then your final salary pension will be reduced so that you don’t exceed the gap.
Your salary of reference is the highest salary in the average salary period. So if your salary and pension benefits take you over this, you effectively wont get paid your pension benefits that are over this cap.
Please note abatement does not apply to the career average scheme.
How much is your Teachers Pension consultation?
If you are looking for a consultation solely focused on your Teachers Pension, we charge a fixed fee of £500. The consultation is delivered over Teams video call.
If you would prefer guidance around not just your Teachers pension but also your wider financial affairs and financial planning, we charge £1,500 and this also covers a comprehensive cash flow which looks at your various retirement income streams and plans for retirement to help ascertain if these plans are realistic and affordable. We can also discuss your options with any money purchase pensions (often called private pensions) or Additional Voluntary Contributions (AVC’s) you may have and the options available to you.
Before carrying out any work for you, we will always ocnfirm what our charges will be upfront.
Get In Touch With Heritage Financial Planning Today
If you’re looking to arrange a consultation please call us on 01244 257587or fill out our contact form.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. The Financial Conduct Authority does not regulate tax planning. This information is based on our understanding of the Teachers Pension which can change regularly.
