How To Increase My Teachers Pension?

If you are a member of the Teacher Pension Scheme with one eye on retirement, you may be thinking about how you can increase your pension.

In this article we are going to look at three ways you can do so to increase your pension which are; buying additional pension, faster accrual and buy out. We’ll touch on the benefits of doing so and what the potential costs of each option could look like.  

Buying Additional Teachers Pension

Let’s start with the first method which is known as buying additional pension. This was available to both the final salary pension scheme and the new career average scheme. It is possible to buy the additional pension in multiples of £250. It’s important to note that the £250 is an annual pension that would be paid as an income when you retire and/or take your pension benefits.

If you do wish to buy the additional pension, you have to do so before  you reach your normal pension age. When you come to buy the additional pension, you can do so via a lump sum payment or you can pay for this on a regular basis and the longest time you can make this payment is over 20 years. 

How much does it cost to buy additional teachers pension?

So how much does it cost and is it good value? Well, this is hard to say and the exact cost will depend on your age, gender, normal pension age and how much additional pension you want to buy. However, the Teachers pension website and calculator can give you a decent idea of how much it would cost. You can also elect to include a dependent pension which will affect the cost of it.

Let’s see an example:

John is 30 years old looking to purchase an additional £250 pension and to do so as a lump sum payment, it would cost him approximately £2,850 as a lump sum amount.

How about if he wanted to pay for this monthly spread out over 20 years? In that case, the cost would be £16.60 per month or £199.20 a year. 

How about if you are closer to retirement? Let’s take a 50 year old looking to buy an additional £250 annual pension. If he/she was looking to buy this as a lump sum, this would cost £3,760. What about if it was bought on a regular basis over 17 years which would take this person to the normal pension age of 68. In that case, the monthly contribution would be £25.30 or an annual amount of £303.60 over the next 17 years. 

Is buying additional teachers pension good value?

So is it good value you might be asking. To answer this question, let’s turn to John’s example.

The cost as a lump sum payment was £2,850 to buy an additional pension of £250 per year. If we take the cost of £2,850 and divide this by £250, this means it would take John 11 years to break even, or put another way if he lived until age 78 he would be in the money.

However, it gets even better. Let’s assume John is a Basic Rate taxpayer as his salary is £38k. John can claim Basic Rate tax relief of 20% on the contribution amount which will mean the actual cost will be £2,280.

In this case, the break even point will reduce to 9 years which makes it even more attractive.  You will have to claim the tax relief back yourself if you opt for the lump sum method. If you pay through regular payments, you will receive the tax relief automatically. 

Other things to note are that if you opt to retire before your normal pension age, the additional pension will be actuarily reduced. Likewise if you leave before the end of the payment period if you opt to pay the cost on a monthly basis, the additional pension will be based on contributions you have made up to the date you leave.  

Buying Faster Accrual for the Teachers Pension

In 2015 the career average scheme was introduced to the Teachers Pension and other public sector pensions.  From April 2022, all active members of the Teachers Pension are now accruing benefits in the career average scheme.

In the career average scheme, you build up pension benefits based on 1/57^th of your pensionable earnings. Let’s take Margaret, she is 30 and her salary is £37,000. After she completed a full year service, she will be entitled to an annual pension of £649 per year.

Under the Faster Accrual flexibilities, it is possible to purchase a faster accrual rate at either 1/55^th, 1/50^th or the fastest accrual rate of 1/45^th.  In terms of how you pay for this, the cost is in the form of an increase in your regular contributions taken from your payslip. Each election lasts for a maximum of a year so if you want to continue with this in following years, you have to elect to do so each year. 

The effect of a faster accrual rate for the teachers pension:

You can see how the faster accrual rate increases the amount of pension banked for each year of service based on Margaret’s example from earlier and her salary of £37,000.

If Margaret opted for faster accrual at 1/50^th of her pensionable earnings, she would accrue a pension of £740 per year, which is an increase of £91 pension per year compared to the standard accrual rate of 1/57th. 

Is faster accrual good value?

Now we know how the faster accrual rate increases the pension for each year of service, the next question is how much does it cost. To work this out we need to look at the faster accrual factors provided by the Teachers Pension. The rates are different for each of the different accrual rates and as you would expect, the faster the accrual rate, the more  expensive it is.

Likewise, the older you are when you elect for faster accrual, the higher the cost typically is.

Let’s look at Margaret’s example again, for a thirty year old looking to elect for faster accrual, the cost of her additional contributions in monetary terms for the faster accrual at the respective accrual rates would be:

Using the 1/50th accrual rate as an example for Margaret, we can see that for an additional cost of £1,306, she would increase the annual pension at retirement by £91.

If we take £1,306 and divide this by the additional pension of £91, we can see that Margaret’s break even point after retiring and claiming the pension would be 14 years (£1,306/£91).

Back to the question of whether this is good value will of course depend on Margaret’s life expectancy which is impossible to predict in advance!

Buy Out

In the career average scheme, your normal pension age is the higher of either 65 or your state pension age.

If you take your benefits before then, your pension will be actuarily adjusted downwards because if you think about it the earlier you take it, potentially the longer the Teachers Pension scheme will have to pay you. In terms of how much it will reduced by, you can see the early retirement factors, but your pension is broadly reduced by around 4% per year for each year you take it early.

Put another way, let’s say your normal pension age is 66 and you take your pension from 63, your pension will be actuarily reduced by approximately 12%.

How does buy out work then. With Buy Out, you can buy up to three years of the actuarial adjustment, which depends on the number of years between 65 and your normal pension age. Put another way, let’s say your normal pension age is 67, this means you can buy out the actuarial adjustment for two years. If your normal pension age rose to 68, in this case you could buy out three years of the actuarial adjustment.              

Strangely with Buy Out, you have to elect to buy out the actuarial reduction within 6 months of first entering the career average scheme. This is paid for as an increase to your pension contributions and is paid throughout your career so it is a long term commitment. If you retire before 65, then you wont benefit from the full buy out election as your benefits will be subject to an actuarial adjustment. So how much does this cost. To work this out you take your faster accrual factor and multiply this by the number of years you wish to buy out from 65 to your normal pension age.

Let’s take Margaret’s example again from earlier. She is 30 and her normal pension age is 67. She wishes to buy out the 2 year actuarial adjustment from 67 to 65. Therefore we multiply 2 by her factor of 0.75 which means she must pay an increase to her regular contributions of 1.50% of her pensionable earnings. 

One other aspect to be aware of for all of these flexibilities, is that there is a maximum cap on the maximum amount of pension that you can buy. For the career average pension scheme, the maximum pension increase for the current tax year is £8,500.

The final way you could increase your pension benefits is to consider Additional Voluntary Contributions in a defined contribution or private pension which is completely separate to your Teachers pension. If you would like to know how private pensions work, please contact Heritage today or read our article which explores how pension drawdown works.

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.