Opting Out – Warning (TPS)

The WARNING!

When you go to opt out you get “warned” about doing this with a list of what they consider the dire consequences…bear in mind that this list is aimed at those who are thinking about opting out of the pension scheme for good and not those who are looking to “lock in” a good set of salaries that could soon become too old to be used and may be lost forever without such action. Opting out to invoke the protective hypothetical calculation is not the same as leaving altogether.

However, the warnings do worry – that is the intention after all, to make those thinking about leaving pause for thought. There are some parts that are relevant but her I through each of the points being made.

my employer contributing towards the cost of my benefits (23.6% of your pensionable earnings);1) Employer contributing 23.6%.
It doesn’t matter how much the contribute. The calculation of your final salary is based on rules and not how much money is paid into the scheme. Opting out to use the hypothetical calculation “rule” to stop the value falling is the point of doing this. It is one of the most counter-intuitive rules that, at its base level means you can get MORE by paying in LESS (one month less), but it is a rule and there to be used if you are aware of it.
(oh and it is rising to 28.6% in April 2024 – but it still doesn’t matter)
a guaranteed pension at Normal Pension Age (NPA);2) Guaranteed Pension at NPA
You do not forfeit your right to what you have already bought and paid for in the scheme. Indeed what you are going is locking in what you hope if likely to give you a BETTER guaranteed pension, at the same NPA. (Opting out for a single month means you come back into the same scheme you would have been on if you hadn’t opted out. Only a break of more than 5 years can change that, AND only if they changed the scheme during that break)
the option to take a tax free lump sum;3) Tax-free Lump Sum entitlement
Unless they change the rules of the scheme this doesn’t happen. Again you would have to be out for more than 5 years and the change happen whilst you were out.
pension value protected through full index linking;4) Pension value protected through index linking.
Yes, this is the whole point of opting out to lock in what have turned out, already, to be HIGHER valued salaries from the past before they get to old to be used. Indeed, opting out, for just one month, is protecting the pension’s value – it is staying in without a break that could lead to a loss of value if in doing that your best salaries get too old to be used in the calculation of the pension.
access to ill-health benefits, should I become permanently unable to teach;5) Access to ill-health benefits.
YES, this one has some merit and is the reason why many suggest taking out extra insurance for the month you are out of the scheme. However, note that you do not “lose” those benefits permanently, they are restored, in full, upon re-joining the scheme. Note also that for your to become so suddenly ill during a single month out that you were fully incapacitated would be highly unusual. You get 6 months full sick pay and 6 months half sick pay, so unless you are already exhausting your sick pay entitlement it would be highly unusual for you to suffer a loss in this regard during a single month out.
children’s and dependants’ pensions;6) Dependent’s Pensions
YES, again, this one has some merit and the point about insurance above applies.
Dependent pensions, those given when you die, are much better if you are “in” the scheme at the time you die. The pension is enhanced by adding on half of what you would have added to the pension between the date of your death and your state pension age.
Then a partner would get 37.5% of that and dependent children up to half what the partner would get.
in-service death grant;6) Death Grant
YES, same as above, if leaving money to your heirs is important then consider taking out extra insurance.
if you are a final salary member, you may also be giving up certain protections.7) Final Salary Benefits
This ONLY applies if you are out of the scheme for more than 5 years.
The benefit referred to here is being able to use future salaries in the calculation of the final salary pension.
Being out for a single month has NO impact.
Also, given that you are opting out because the salaries from 8 to 10 years are are better than your current salary it would take some significant pay rises in the future for your future salaries to catch up and then overtake the ones you are locking in anyway!

One Day Rule

Taking the pension “early” requires a break in employment…but how long a break?

The Regulations

https://www.legislation.gov.uk/uksi/2010/990/made/data.pdf

The Pension scheme lays down very clearly how long a break is needed in order to take the pension before you reach you Normal Pension Age:

The Schedule in the regulations that covers taking “Early” retirement starts on page 121 and is called “Case E”

Case E: early retirement with actuarial adjustment
10.—(1) A person (P) falls within this paragraph if—
(a) P was in pensionable or excluded employment at any time after 29th March 2000,
(b) P ceases to be in such employment,

Page 121, Case E (10), https://www.legislation.gov.uk/uksi/2010/990/made/data.pdf (The Teachers’ Pensions Regulations 2010)

There are other parts to this regulation but the key part above is that you have to “cease” to be in employment. This is then expanded on to explain what is meant be “ceasing” in regulation 14, shown below:

For the purpose of this Schedule—
14 (a) a person is not to be treated as ceasing to be in pensionable or excluded employment unless at least one day passes without the person being in such employment after the person ceases to be in such employment;

Page 122, Case E (14), https://www.legislation.gov.uk/uksi/2010/990/made/data.pdf (The Teachers’ Pensions Regulations 2010)

Simply put, you can take the pension early so long as you are not employed as a teacher ON the day you have asked for the pension to begin.

School Policies

Unfortunately many schools and LAs get confused over what is a break in employment, using what is needed to reset other employment rights and not what is needed for an employee to take their pension. There is no legal barrier to an employer ending, with the agreement of the employee, a contract of employment on one day and starting a new contract after a gap of 24 hours.

A number of schools HR departments are rather lazy in this regard and instead of just doing what is required to enable the employee to take their pension insist on a longer break because of their misunderstanding of what is needed to constitute a “break” in employment. This is often based on other employment rights, such as avoiding having to repay redundancy payments, or entitlement to sick pay etc.

Unfortunately, if they do insist on a longer break there is very little the teacher can do in such circumstances since they are over a barrel as they do need the break in employment in order to start taking the pension before their normal pension age.

This is NOT the case for teachers who have already reached their scheme’s normal pension age. They can start payment of their final salary pensions simply by opting out of the pension scheme without needed any break in employment.

Early But Out Explained

How it works.

The question was, how long do you have to pay when you sign up for the Early Buy Out option.

Forever, or as long as you want, is the answer

Let me explain how it works.

Every month you add a bit to your pension (1/57 of that month’s salary).That bit will pay out when you claim your pension, being paid every year for the rest of your life, but will be reduced if you take it early.

The reduction is based on your age.This reduction is done in two parts because it is based on the State Pension Age (SPA) and people have different SPAs.

The earliest SPA is 65. If your SPA is later then 3% more reduction is applied for each year later your SPA is than 65. It is this latter 3% reduction that you can “buy out”. You can only buy out the number of years between 65 and your SPA.

If you take the pension at 55 then the reduction factor from 65 is 0.648.If your SPA is 67 then a further 0.94 factor is applied (2 lots of 3%).

Example. An unreduced pension of 10,000.

  • Taken at 55 without any buy out:£10,000 x 0.648 x 0.94 = £6091.20
  • Taken at 55 with buy out of 2 years:£10,000 x 0.648 = £6480.00

HOW LONG YOU PAY FOR

In just the same way that you add a bit every time you are paid to the pension if you elect to buy out you pay a bit more for the advantage of the buy out. Every month.

What happens is that the “bit” you add to your pension in that month will get the advantage if, at the same time, you paid extra for the buy out.

If you stop paying for the buy out then whatever you add to the pension in the next month won’t get the benefit. However, all the amounts you did pay for earlier will still get it.

Example. You pay for the buy out on the first £5,000 that is added to your CA pension. You then go on to add another £5,000 without paying for the buy out.

So you have £5k with and £5k without.

The calculations then for taking it at 55 are a mix of the two I put earlier, thus:

  • £5000 x 0.648 x 0.94 = £3045.60
  • £5000 x 0.648 = £3240.00

Total Pension: £6285.60

This image shows the factors and combined factor for different ages based on someone with an SPA of 67 buying out 2 years.

Proof of TPS Membership

So you found a dodgy break in your history?

Over 90% of problems with the pension can be traced back to incorrect records being sent in to the administrators by employers.

The responsibility for putting errors right lies with the employer, the administrators (TPS) of the scheme have very limited powers to alter the records they have been sent, mainly only in cases where the employer no longer exists.

How to correct the problem?

Contact your employer and explain the problem and ask them to correct it.

They may be willing to do that immediately but with many employers no longer keeping records for more than 7 years you may find that they want YOU to prove that they employed you and that you were in the pension scheme.

Evidence?

PAYSLIPS: The very best evidence is your pay slips that show that the school employed you AND that you were paying into the pension scheme. The problems if often that we no longer have our pay slips and it can be many years, decades even, in the past that the problem exists.

NATIONAL INSURANCE RECORDS (Pre-2016): HMRC keep records going back to the day you were issued with a number! As such you can ask them for this data and it is, for employment before 2016, very useful proof.

Before 2016 teachers who were paying into the TPS paid a special rate of National Insurance and so this is recorded by HMRC. It is called the “contracted out” rate. Ask TPS for your records of employment and the NI rate and it will show you, for periods up to 2016, both who employed you and whether you were in the TPS or not.

Look for the employer and the “Category Letter” for the employment as proof you were in the TPS

Getting your records

Make a “Subject Access Request”: https://www.gov.uk/guidance/hmrc-subject-access-request

Retrospective AP – Complaint 13 Dec

In response to my complaint that no method for applying for retrospective was available I have received the following response.

There were 3 points I made that I felt needed to be addressed

  1. A proper form to be provided to apply for retrospective additional pension
  2. A calculator to be provided to allow members to see the costs for purchasing retrospective AP in the years 2015 to 2022.
  3. A range of options for taking payment for the purchase of AP

The first of these has now been addressed, with a form for applying for retrospective additional pension now available: https://www.teacherspensions.co.uk/-/media/documents/member/applications/miscellaneous/apb-december-2023-v18-fs.ashx

The second and third have been ignored, though the response I have received does give the costs for two ages.

Retrospective Additional Pension Purchase

The form to apply for this has now been published: Link

Turn back time and buy AP in the Final Salary Scheme

Up until this point we have been told to complete the old form and include a covering letter requesting the application be taken for additional pension (AP) to be purchased in the final salary scheme during the remedy period.

Before I start going into the details of this there are some parts which are not completely clear and so I must warn you that the figures may not give a true and accurate picture. However, the figures I do have are from an application made for retrospective AP. This date is asked for on the new application form in Section 2

I am going to assume that the “Pension Increase” will be applied from the date that the additional pension (AP), however this is not certain to be the case as the letter I have seen says this: “Your Additional Pension increases in value from the date of your full payment to your retirement date in line with pension increase factors.

I am basing my assumption though on the fact that the payment requested does include an element of interest based on the time that has passed since the date asked for in Section 2 above. I don’t believe you can charge interest on something if you then take the date of the payment as the basis for applying the value of what has been bought.

Figures for 2016 – 50 Year Old

AP has to be bought in blocks of £250 but for the purposes of this post I will look at purchasing 4 such blocks, totalling £1,000. The date for this to be taken as 2016. I will also include the purchase of family benefits (50% to a partner etc)

£1,000 of FS AP (2016) would cost £16,080. Interest charged £1,382.

My Analysis

The interest for nearly 8 years is only 8.59%, that’s a simple annual interest rate of somewhere between 1.0% and 1.3%. That “feels” like good value.

Pension Increase: from 2016 to 2024 the inflation rate is in the region of 31.87%. If this is applied to the £1,000 then it would be worth £1,318.70 now.

Age to recover the investment

If the Pension Increase is applied from the elected date of purchase, which I believe it should, then dividing the cost (£17,462) by the current value (£1,318) gives us 13.3 years.

Taken at 60 that would be by 73.3.

If I am wrong about the way the PI is going to be added then it wold take 17.5 years to recover the investment, so by the age of 77.5

Compared to buying AP in the CA scheme now

The question here then, is it better to buy retrospective FS AP or to buy AP in the current career average (CA) scheme. For this comparison bear in mind that a 50 year-old in 2016 would now by 57/58.

A 57 year-old buying £1,000 of CA AP (2024) with family benefits would pay £15,160. That would take them 15.2 years to recover that investment. However, this AP would only be paid, in full, if they started taking it at 67.

67 plus 15.2 means they would get their investment back at the age of 82.2

I would suggest, therefore, that if you are considering the purchase of additional pension then it would be far better value to make an application for the retrospective purchase of AP from the remedy period than to buy it in the current career average scheme.

Entitlement Day

After hearing again, for the umpteenth time, that you MUST have a break in employment to take the final salary pension I decided to put the answer here.

UNDER 60 (Final Salary scheme started before 2007)

Yes, to take this pension “early” you MUST have a break in employment.

60 or OVER

NO! For the NPA60 scheme you do NOT need a break in employment, what you need is a break in “pensionable employment” and these are not the same thing. You can create such a break without leaving employment simply by opting out of the pension.

THE REGULATIONS

https://www.legislation.gov.uk/uksi/2010/990/made/data.pdf

Schedule 7 – Retirement Benefits

Regulation 2:

2.—(1) Where a person (P) satisfies the condition for retirement, the entitlement day for Case A is—
(a) if P is not in pensionable employment on the day on which P reaches the normal pension age in relation to the reckonable service, the day on which P reaches that age, and
(b) if P is in pensionable employment on the day on which P reaches the normal pension age in relation to the reckonable service, the day after P ceases to be in pensionable employment.


Part 2 – Pensionable employment

Regulation 7 paragraph 3

(3) A person who makes an election under regulation 9 (election for employment not to be pensionable) is not in pensionable employment while the election has effect.


Overtime – Refund, but NOW or LATER?

https://youtu.be/pXWVro3ZAnU

With the “rollback” taking effect every, eligible, teacher has had their 2015-2022 service returned to the final salary scheme and as a result “overtime” causes an issue for the administrators.

Overtime is NOT pensionable under the final salary scheme but IS pensionable under the career average scheme.

This means that if you had overtime in the remedy period you paid the pension scheme around 10% of that in return for some pension, just the same as you do for your normal wages. However, that should only happen if you are in the career average scheme and not if you are in the final salary scheme. The “solution” is for the scheme to refund you what you paid, but they really do not explain what you may be giving up if you take this refund.

This video goes into your real options and consequences.

New Regulations

The Government has concluded the consultation and their response can be found here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1173440/Teachers_Pension_Scheme_transitional_protection_regulations_consultation_response_.pdf

Points I have picked up on so far:

51. For tapered members (born between April 1962 and September 1965) there is a small chance that both options will be worse than what they currently get. Whilst there is no option for them to retain their better, current, position because it was at the root of the illegal age discrimination case, the Government have indicated that no repayment of the amounts already paid should be required.

56. Hypothetical calculations should, from October, be in included in the benefit statement – re-titled to be an RSS (Remediable Service Statement). This has been one of my particular irritations with the current statement so I am glad to see it is being addressed as not having the correct figures on the statement doesn’t help members make informed choices.

60.

70. Opting in and out for different periods is to be permitted but there appears to be a greater emphasis placed on the member being able to demonstrate why they would have made these choice compared to those who wish to re-instate the whole period.

71. Applying for service re-instatement is going to be subject to a 12-month clock starting on 1 October 2023. This I still believe to be contrary to the primary legislation as I detailed in my response to the consultation. If you did opt out of the pension scheme because of the changes then you will need to submit your application before 1 October 2024 but it does then appear that they will give you a further 12 months to confirm your choice.

80. Retrospective option to buy additional pension in the final salary scheme.

83. Early Buy Out window re-opened. Normally you have to make this choice in the first 6 months of joining the scheme but this will be opened again, for affected members, from 1 October 2023.

134. Lump sum (the optional additional lump sum). On taking the pension members were able to “sell” some of their annual pension for an extra lump sum. If they decide to put 2015-2022 back into the final salary scheme they will be able to re-visit that choice. My personal opinion is that selling part of the pension to get the larger lump sum is poor value for money and this option gives those who made that choice the opportunity to reconsider. Given that many will have been in receipt of the pension for a number of years they may now see the value of the index-linked part of the pension they gave up in a clearer fashion.

Part Time “Days Out” Checker

After fielding a number of queries regarding the days out and how they are recorded for part-time teachers I created this sheet to allow teachers to check their figures:

https://docs.google.com/spreadsheets/d/1zel8OQaROLesBE-mXGzH3q0tOzuv6WgjioXq75l0aS0/edit?usp=sharing

The way that part time work is recorded is not very intuitive and I sympathise with them. After all if you work 4 days a week then in a month you are likely to miss working on 4, or at the most 5, days in that month…so how come the statement shows 6 “days out”…there aren’t that many “Mondays” in ANY month!

To understand how part time service is recorded requires a different approach than just looking at the actual days you work in a week, we need to go much wider than that.

A full time teacher may work 5 days a week and they do that for 39 weeks in a year, that is 195 days, but their service record for a full academic year is recorded as all 365 days in the year (even in a leap year!)

In order for a part time worker to be credited with the correct proportion of the pension, i.e. 80% for one who works 4 days a week, that proportion is applied to each pay period. In a full academic year then a 0.8 part time teacher should get 0.8 x 365 days credited to their service record.

0.8 x 365 = 292 days. This is recorded by having the rest of the year, 73 days, labelled as “days out”.

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