TPS, AVC and the BIG Three

A recent study found that 67% of teachers don’t know how much they will have to live on in retirement and 61% of teachers have said they are confused about their pension benefits. Alex Barnes gives advice on planning for the future.

A recent study found that 67% of teachers don’t know how much they will have to live on in retirement (1) and 61% of teachers have said they are confused about their pension benefits (2). Over the past decade the Teachers Pension Scheme (TPS) has changed remarkably but how do the impact you?

The TPS is split currently in to the BIG three parts. Pre-2007, Post 2007 and 2015 schemes. Whether you are in one, two or indeed all three largely depends on your service history but how each are treated are very different. Each have different normal pension ages, accrual rates and there are different methods for calculating your salary. The good news is this type of pension scheme is known as a “Defined Benefit” scheme and is defined as a type of pension plan in which your employer promises a specified pension payment, lump-sum (or combination) on retirement that is predetermined rather than depending directly on individual investment returns. The first step in working out your benefits here is to register for the “My Pension Online” site with TPS and get a look at your latest statement and start to seek out advice on the value of these benefits.

The other major type of pension scheme is a “Defined Contribution” scheme and this differs from your TPS as you are paying an actual amount into a pot each month and the pot value increases or decreases dependant on the investments chosen by your find manager. You may have a Teachers AVC – this is a defined contribution pension. A recent Work and Pensions Committee report identified that 32% of people who withdrew their retirement pots like these in full chose to save the largest share of it in standard savings products like cash bank accounts and Premium Bonds. These are likely to have lower rates of return than pension savings as well as potentially higher tax liabilities (3).

Indeed, concerns continue to grow for those who choose to draw on their pension savings without taking advice. Drawdown demands a different mindset to that needed by those who retire with an annuity, as it requires individuals to plan their own investment strategy and ensure that withdrawals are sustainable. And while the majority are taking a sensible approach, the minority are withdrawing pension funds at rates that would see this money run out in a decade or less. And if they’re relying solely on the State Pension to see them through their later years, they will have to accept that their standard of living is going to drop significantly.

The State Pension also provides a limited income (£164.35 for a single person, per week, based on a full NI record in the 2018/2019 tax year) and is separate from the above two schemes, and generally falls drastically short of what is really needed to fund a comfortable lifestyle.

So how do we avoid poverty in retirement? First, decide how large a fund you will need. One method is to multiply your target retirement income by 25. For example, if you think you’ll need £25,000 a year, aim for a fund of £625,000 from your defined contribution portion and then add this to the valuation of your defined benefits portion.

Next, select the most appropriate investment vehicles to achieve your goal. Property, investment bonds and ISAs have all proved popular over recent years but don’t offer the same degree of tax breaks as a pension.

For further information, or to arrange a no obligation meeting, contact Alexander J Barnes on the details below.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.

The levels and bases of taxation and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

(1) Research based on a survey of 108 teachers by Censuswide, February 2014
(2) Data taken from a survey of 210 teachers carried out by Censuswide, February 2016
(3) Work and Pensions Committee Report – The effects of pension freedoms, March 2018

The Partner Practice represents only St. James’s Place Wealth Management plc (which is authorized and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The title ‘Partner Practice’ is the marketing term used to describe St. James’s Place representatives.

The author

Alex Barnes

Alex has over 13 years’ experience in the industry and is a detailed specialist in TPS and LGPS. Alex has a great deal of experience with NASUWT union. Alex has specialised for many years in the financial care of Teaching Professionals. He has developed an acute knowledge of the various teacher’s pension schemes and the tax affairs and concerns of his clients. Alex delivers a holistic planning approach to all his clients over a short, medium and long-term basis on everything from providing teacher’s mortgages, protection plans, savings advice and pension advice. No matter what age of client if it be preparing to buy their first house or planning to start their retirement chapter of life, Alex takes time to understand the important things to his clients and believes in building deep long lasting relationships with them to partner with them on their wealth to get the best future possible.