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.

6 thoughts on “Early But Out Explained

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  1. Hi,
    I am a fellow Maths Teacher nearing retirement and have been really impressed by the explanations in your videos. When originally moving across to the Career average scheme in 2017 (tapered relief) I applied for AAB Buy out. Following your videos on the Mccloud judgement I wrote to Teachers pension regarding AAB Buy out and was suprised by the response. They stated that although if you already had AAB Buy out it would be null and void from April 2022 unless you reapplied for it before 31st March 2024. I wonder what other additional benefits this policy affects due to the Mccloud judgement.Hope this makes sense.
    Many thanks
    Julian Rees.

    1. We have seen letters going out that strongly imply that opting for the Buy Out will be backdated to 1 April 2022 but, interestingly, that no backdating of the contributions is going to be asked for. Implying that you get those 2 years for “free”.

  2. Hi David
    I am a 53 year old teacher planning to retire at 60. If I buy out two years from my career average pension, it will cost me approximately £840 a year and therefore £5040 if I pay it until I retire. Alternatively I have considered just relying on my final salary pension when 60 and leaving my career average until 67 when it won’t be reduced. Please can you tell me what you think of this plan?

  3. I wonder if you can help.

    I have bought into the AAB buyout from 2015. I have now re-joined post 2022.

    However I have just read a blog on TPS that includes the following:

    “No refund will be made of any Buy Out contributions if you choose to claim the career average pension before age 65.

    If you left pensionable service at age 60 for example and claimed your final salary pension you would need to leave your career average pension deferred until age 65 to benefit from any Buy Out election. Your career average pension would be payable in full at age 65 rather than your State Pension Age.”

    This was published on ‘Last Updated: 02/02/2024 10:46’

    I have gone back through all I can find on this and have never seen this mentioned before.

    My assumption was that with my buy out it would be applied pro-rata if I were to retire prior to 65. The blog above seems to suggest this is not the case and I will loose my money (it is quite a lot of money!). Reading your post, it seems that was your interpretation too.

    I also have concerns about where the money paid between 2015 and 2022 has gone!!!

    Thanks for your help!

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