Whether you’ve taught for a long time or are just starting out in the pedagogical world there’s one thing every teacher needs to know about and that’s their pension. Unfortunately, pensions are also one thing a lot of teachers are confused about, and the latest reforms to public sector and teachers’ pensions aren’t clearing up any of the confusion. This article is designed to give a lucid and accessible guide to teachers’ pensions however far along your teacher career you happen to be so that you can engage in finance planning from an informed perspective. The article will also look at the recent reforms to teachers’ pension plan and public sector pensions more widely.
A Guide to the Teachers’ Pension Scheme
Every teacher’s pension - whether you’re a lecturer, a part-time teacher, have retired or are an NQT - is controlled and administered by Teachers’ Pensions, under the Teachers’ Pension Scheme, on behalf of the Department of Education. Membership is automatic (but not compulsory) and every employee who comes under ‘The Regulations’ (The Teachers’ Pension Regulation 2010) qualifies for the scheme. The scheme is contributory, so both you and your employer pay into it each month; your employer will pay a bigger share. The scheme is an unfunded scheme, which means that there isn’t a sum of money sitting somewhere for you to collect, rather the money you pay in helps to offset the cost of pensions for retired teachers. When you retire, active teachers’ money will be used to pay your pension. The pension is based on your service and salary and when you have retired you can receive it as a regular income and a lump sum. If you joined the scheme any time before January 2007 you will automatically receive a lump sum upon retirement – if you joined after you can opt in to receive a lump sum.
Membership of the Teachers’ Pension Scheme means you’ll pay reduced national insurance contributions and you’ll be contracted out of the State Second Pension because the pension you’ll get will be better than what the state would pay, but you do get a Basic State Pension on top of anything you get from your Teachers’ Pension.
Your pension is designed to be protected against rising prices and you can buy extra pension credits to boost your pension, or transfer credits from another pension scheme within a year of becoming a teacher and therefore joining the Teachers’ Pension Scheme.
There’s been a lot of media attention surrounding public sector pension reform and in order to plan for retirement properly you need to have a firm understanding of what changes are afoot, and what might happen, so you can do some robust and realistic finance planning for the future. Changes to public sector pensions are being brought in after recommendations from Lord Hutton stating that pensions are becoming increasingly expensive to sustain as people are on average living 10 years longer than 30 years ago and that the current system is unfair on those who earn less. The Hutton report also indicated a need to redress the balance between employee and employer contribution, as the cost of increased life expectancy of employees was said to fall upon the employer far more than the employee.
Proposed changes to Teachers’ Pensions are as follows:
- Moving from a final salary pension to a career average pension
- A phased increase to teachers’ Normal Pension Age
- A rebalancing of employee and employer contributions to redress the proportion of financial burden between the taxpayer and member.
The increase in employee contribution has been phased in since April. The rest of the changes won’t happen ‘til 2015. The overall consequences of the changes are that members will be paying higher contributions and receive lower benefits after 2015. Teachers who aren’t within 10 years of retiring will also experience the effect of a higher normal retirement age, but this does not necessarily mean they will have to retire at 68. By 2015 teachers’ will be contributing up to 3.2% of their salary, which represents a 50% increase in members’ contribution.
Although the changes to public sector pensions will affect teachers, the Teachers’ Pension Scheme is still considered to be one of the best public sector pensions around and the Government have said the reforms will ensure the scheme remains affordable and fair to both members and taxpayers alike. One benefit of a public sector pension is that you are guaranteed a pay-out, unlike with private pensions; this benefit is certainly not one to dismiss.