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! |
