More teachers than ever are considering early retirement, but deciding to leave the classroom for good can be a daunting prospect. Can I afford to finish? How will I know I’m making the right choices with my pension? What about my AVCs? Will I still pay tax? There’s a lot to consider and for most of us retirement is one of the biggest decisions we’ll ever make, so getting it right feels crucial!
Here we cover five key actions to ensure you achieve the retirement you deserve.
Consider your retirement plan
The key to a successful and sustainable retirement starts with considering what you want your retirement to look like. For some, this might mean jet setting across the globe for six months a year, for others contentedly curling up on the sofa with a cup of tea after a long walk. Life after the classroom looks different for everyone and therefore your financial needs will be different too. Think about how you plan to spend your days and then sit down with a budget planner to quantify how much you’ll need, itemise your monthly outgoings and the ad-hoc expenses like holidays too. Consider also any life events that will affect your cash flow as for many of us milestones like children going to university or mortgage debts finishing happen at a similar time of life to retirement. These events can make or break affordability. For example, if your mortgage finishes the year you plan to retire, your outgoings will reduce significantly meaning you’ll need much less income to maintain your lifestyle.
Get to grips with Teachers’ Pension Scheme
The good news is your Teachers’ Pension Scheme (TPS) provides a great start to retirement plans. But, like most pensions, it is complex and hasn‘t been short of changes over the years. As a whistle stop overview, TPS is what’s known as a ‘defined benefit’ scheme meaning it’s the gold standard of pensions and is calculated based on your ‘average salary’ and the number of years and days you’ve worked. At retirement, you’ll receive a guaranteed income for life, which will increase every year by inflation – something that’s vital with the current cost of living hikes! In most cases, you’ll also receive a one-off tax-free lump sum too and have the option to increase that lump sum in exchange for a reduced monthly pension. Your TPS will have a normal pensions age (60, 65 or state pension age) depending on your age and when you joined the scheme but, under current rules, you can draw your TPS anytime from age 55 subject to reductions. There’s also an option to take ‘phased retirement’ and draw a percentage of your pension but carry on working reduced hours.
Your pension statement (available via the TPS online portal) provides lots of useful information including your pension accrued so far, the scheme details, and your salary and service history.
Understand your options with other pensions and plans
Your TPS is just one piece of the puzzle, and you may have other pensions – an old workplace scheme, a private pension or even AVCs – that can also be used to support your retirement. Many of these pots, such as AVCs, are a different type of pension known as ‘defined contribution’ and operate under separate rules. They are more flexible, allowing you to withdraw cash from the pot with 25% being tax free and the rest taxed as income. Unlike your TPS though there are no guarantees and you can risk running the pot dry or paying more tax than is necessary so it’s important to take advice.
Any savings and investments can also be brought into the equation to help fund your retirement and ensure your money is working harder for you, especially while interest rates remain low.
Find out what the state will provide
You will also be entitled to a State Pension. This can’t be taken early and is dependent on how many qualifying years of national insurance contributions you’ve made. The new flat-rate state pension is dependent on 35 qualifying years and is £185.15 per week at age 66 for someone approaching state pension age today. For many public service workers like teachers, the rate is slightly reduced due to ‘opting out’ so it’s a good idea to get a personalised forecast so you know exactly what you’re due.
Ask the experts
Even to the most diligent of planners pensions can be confusing and nothing beats sitting down with an expert to help you plan life after work. Seeking advice from a specialist financial adviser can remove the complexities and offer peace of mind that you’re on the right track. Then all there is to do is to look forward to sipping a Mimosa on faraway shores. . . and who knows it could be closer than you think!
If you would like to get in touch regarding any of the points above, please contact Roz on the below details.
Roz Barnes of Roz Barnes Financial Planning Ltd is a partner at St. James’s Place Wealth Management and specialises in the financial needs of education professionals.