Category: Flexibilities

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.

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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.

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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.

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Consultation – Interest on Back Pay

One of the details hidden away as a reference to another document and then a reference from that document is the amount of “interest” that will be added to amounts owed to members for underpaid lump sums and pension payments.

Under Part 8, “Liabilities and payment”, in Chapter 2. (Page 35 of the draft regulations)

Interest
66.—(1) The scheme manager must calculate interest on a relevant amount described in direction 15 of the PSP Directions 2022 in accordance with the provisions of directions 14 and 15 which apply to that description of relevant amount.

On page 40 of this document is the table that lays out what the “interest” amounts will be…and they fall a long way short of inflation!

For comparison I have added a column to this table showing the inflation factors that were in effect on the dates shown:

https://docs.google.com/spreadsheets/d/1D_wdYsWUPTWMR_Cb6KEq3QNDIlld6AV4dc8_pTGX51g/edit?usp=sharing

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Lump in the throat

Could you be owed hundreds of pounds?

If you bought additional pension with a lump sum, quite possibly.

HMRC are not used to dealing with pension schemes that are NOT set up for automatic tax relief.

https://youtu.be/43nSpsANhBc

Link to spreadsheet

The relevant HMRC manual page to quote if the first person you talk to doesn’t understand this fully is the 3rd bullet point on this page:

www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044210

  • where a member makes gross contributions to a registered pension scheme, they can make a claim to HMRC to obtain the tax relief on the contribution. The amount of the contribution is then relieved by being deducted from the member’s total income for the tax year in which the payment is made. The deduction will be shown on the member’s Self-Assessment to give them the correct amount of tax relief. Further information on claims is at PTM044240.
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