Skip to content
Before we can answer how much income your teachers pension will be worth, and how your pension works, we need to firstly break down the various components of the teachers pension. This is also important as it will depend on when you joined the scheme.
There are potentially three elements to the teachers pension, the two final salary schemes and then the career average. If you joined the scheme in or after 2015, you will be enrolled into the career average scheme.
If you joined the scheme prior to 2015, then you will be in one of the final salary schemes. Which one will depend on exactly when your pensionable service started. If you joined the scheme before 1st January 2027, then you will be enrolled into the final salary normal pension age (NPA) 60 scheme. If you joined after the 1st January 2007, then you will be enrolled into the NPA 65 scheme. There is a subtle difference between the two.
The Career Average Teachers Pension Scheme
In the career average scheme, which to recap is the scheme members will belong too if their pensionable service started after 2015, the accrual rate is 1/57 which means that for each year of pensionable service, you accrue 1/57 of your pensionable pay.
As an example, lets say Karen’s pensionable pay is £45,000 per year. Then she will accrue a pension of 1/ 57 x £45,000 = £789 per year.
The amount above is not just static. This will increase each year. If you are also an active member (which basically means still working and accruing benefits in the scheme) then the pension you have accrued will increase by CPI plus 1.6% a year. If you have left the teachers pension scheme, you are what’s known as a deferred member. Your pension will still increase each year but only by the CPI figure. Let’s see an example with Karen again.
Karen in the example earlier remained a member of the teachers pension scheme. So at the end of year 2, what benefits would she have accrued? Let’s assume CPI inflation was 2.50% and beginning of year 2 her salary increased to £47,000 pa
Year 1 pension earned:
£1/57 x £45,000 = £789.47 per year
Year 2:
Pension from year 1 x 1.041% (CPI + 1.6%)
£789.47 x (1.041) = £821.84 pa
PLUS
1/57 x £47,000 = £824.56 pa
Total pension accrued = £1,646.40 pa
How career average pension tax free cash works?
You will often hear how you can take 25% of your pension tax free, but how does that work with the teachers pension? As the CARE has no automatic lump sum, in order to work out the maximum tax free cash you can take you need to work out what 25% of the capital value of the annual pension is. To work this out, you take out what the annual pension is forecast to be and multiply this by 20.
Using Karen from earlier, lets say her annual pension is forecast to be £18,000 per year. To work out the capital value we take £18,000 and multiply by 20 which works out at £360,000. The maximum tax free cash is therefore £90,000.
However, to work out the tax free cash you must reduce the annual pension by the corresponding amount of tax free cash.
Let’s say Karen takes £36,000 tax free cash which works out at 10%, we need to reduce the annual pension by a corresponding amount. In other words if she opted for £36k tax free cash, her annual pension would be reduced to £16,200 per year.
What’s the retirement age of career average teachers pension scheme?
In the career average scheme, the normal pension age is the later of either age 65 or state pension age.
As things stand, you can take the pension benefits from age 55 (unless you can qualify earlier through ill health). It is also worth nothing that from 06/04/2008 the minimum pension age is rising from 55 to 57.
How about the final salary teachers pension scheme?
As for the final salary scheme, it is different. Let’s start with the NPA 60, which as a reminder is for anyone who joined the teachers pension scheme before 1st January 2007.
The accrual rate for the NPA 60 scheme is 1/80th. Although it is often called the ‘final salary scheme’, this isn’t totally correct. In terms of what salary to use, it is known as the ‘salary of reference’.
This is the higher of either your pensionable pay in the final 12 months or the average of the best three consecutive years pay in the past 10 years, after accounting for inflation.
As you would imagine, the normal pension age is age 60 at which you can take your benefits without any early retirement penalties. This also means you can take the pension from age 55 under current rules, but this will again lead to early retirement penalties.
How final salary NPA 60 pension tax free cash works?
Unlike the career average scheme and the later final salary scheme which we will come onto later, with the NPA 60 scheme, there is an automatic tax free lump sum which is a multiple of three times the annual pension.
An example of how final salary NPA 60 benefits increase?
Let’s take John. He had 32 years in the final salary pension scheme and his salary of reference was £39,000 per year.
If we take 32/80 x £39,000 this means the annual pension John accrued was £15,600 per year. We also need to factor in the tax free lump sum and so the tax free cash amount would be £46,800.
How the teachers pension final salary NPA 65 works?
The final salary NPA 65 is similar to the other final salary scheme, but there is a subtle difference. Anyone who joined the teachers pension after the 1st January 2007 will initially have belonged to this scheme.
The first difference is that the accrual rate is 1/60 which is more favourable. The salary used in the calculations is again called the ‘salary of reference’ which is the higher of either:
- The salary in your final year of pensionable service or
- The average of the three best consecutive years within the last ten years
Let’s say Phil has 30 years of pensionable service and his salary was £60,000 per year. This means he will have built benefits worth £30,000 per year (30/60 x £60,000).
How the tax free cash works with the NPA 65?
The other big difference of the two final salary schemes is that unlike the NPA 60 scheme, the NPA 65 scheme doesn’t have an automatic tax free lump sum component.
Instead the pension benefits need to be commuted into a lump sum. The commutation factor is 12:1, which means that for every £12 of tax free cash you take, this will reduce the annual pension by £1. Let’s say you opted to take £1,000 tax free cash, this will reduce your annual pension by £83.
The next question to ask is how do you work out the maximum amount of tax free cash available. The formula for this is:
Annual pension x 30 / 7.
Let’s use Phil’s example from earlier who had built up an annual pension of £30,000 per year.
The maximum tax free cash Phil can take is £128,571. However, if he did take the maximum amount, this would reduce his annual pension by £10,714 per year.
The available tax free lump sum is subject to an overall limit across all of your pensions which is called the lump sum allowance (LSA) which as things stand is £268,275.
What about the McCloud judgement?
When the career average reforms were introduced in 2015, the initial plan was that members who were within 10 years of their normal pension age were protected and allowed to stay in the legacy final salary schemes, whilst those 10+ years or more away from the normal pension age were automatically moved into the career average scheme. This was judged to be unlawful and discriminatory.
A remedy period was introduced. Any new members who joined the scheme after 2015 were enrolled in the career average scheme. Also, all existing members from 01/04/2022 were automatically enrolled into the career average scheme.
What is the remedy period?
For existing members prior to 2015 who had service built up at any time between 2015-2022, all pensionable service was automatically rolled back into the legacy final salary scheme. However, before retiring the TPS must give you the option to take the benefits built up during the remedy period in either the final salary scheme or the career average.
Can I retire early with the teachers pension scheme?
As we now know, the normal pension age of the two final salary schemes are age 60 and 65 respectively, with the career average scheme having a later normal pension age which is the later of 65 or state pension age.
Although you can take the pension benefits from age 55 onwards (rising to 57 from April 2028), if you do opt to take your pension benefits early, an actuarial reduction is applied to your pension to reflect how the pension in theory should be paid for longer.
In terms of how much they will be reduced by, this is quite a complicated formular which is based on the governments actuary’s department (GAD). As a rule of thumb the reduction is approximately 3% per year so let’s say you only have accrued benefits in the career average scheme and your normal pension age is 65 and you retire at 62, as this is three years early a reduction in your accrued benefits of 12% could apply.
Finally, if you qualify due to ill health, you may be able to take your pension before before the normal pension age without incurring any early retirement penalties.
Can I take my final salary benefits without taking my career average benefits?
Assuming you are a member of both schemes, if you wish to retire and take your benefits before the final salary Normal Pension Age, then you must take your career average benefits at the same time.
However, if you have reached your normal pension age for either of the NPA 60 or NPA 65 final salary scheme, then you can opt to defer taking your career average benefits until the NPA to avid incurring an early retirement penalty.
What qualifies as pensionable pay for each scheme?
Another difference between the two schemes is what counts towards pensionable pay.
In the career average scheme, overtime is included in pensionable pay whereas in the final salary schemes is generally excluded.
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.
